How Much Should You Have in the Bank to Buy a Home?

House model and money on weight scale with out of focus home.

Buying a home is going to require that you have some money in the bank. There are many expenses you will need to save up for beyond just the down payment.

How Much Money do You Need For the Expenses When Buying a House

Before you buy a home, it’s important to note how much you can afford. There is not should be any space for mistakes when it comes to your home buying. Your house is going to be your biggest purchase so this is an important first step.

Begin the budget by figuring out how much you and your co-buyer, if you are having one, earn each month. Be sure to include all revenue streams, such as investment profits and alimony.

List housing costs and your total down payment. This should include the annual property taxes, estimated mortgage rate, loan terms, and homeowner’s costs.

Tally up the total expenses. This is the money that you will need on a monthly basis. It’s important to be accurate about how much you spend as this dictates what you can reasonably afford. Then use a home affordability calculator to get a better idea of your home budget.

One way to be smart about how much home you can afford when you buy a home is to follow the 28/36% rule. If you max out your income to buy your dream home, it can put you in a bad spot financially. There should still be room in your budget for emergencies, retirement and other expenses. This rule of thumb says that you shouldn’t spend more than 28% of your gross monthly income on housing expenses and then no more than 36% on debt, which includes housing and other debt, such as credit card payments, car expenses, and student loans.

Depending on where you live, it’s possible that your annual income could be enough to cover the mortgage or, in some cases, it may fall short. Knowing what you can afford will help you decide how much you should have in the bank when you go to buy a home.

Expenses at Closing to Buy a Home

In order to buy a home, you need cash for the down payment and even more. There is a lot that you will need to bring to the closing and one of the big shocks of buying a house is finding out you need more to close on the home than just your down payment. It can be hard enough to save for the down payment and then to find out more can be disheartening.

The Down Payment

This is the part that is the most obvious to home buyers. It’s usually a percentage of the price of purchase. How much you will need for a down payment will depend. With many lenders, if you want to avoid having to pay private mortgage insurance then you will want 20% down. Coming up with this amount can be hard for a lot of first-time buyers so there are other options if you qualify for certain types of loans.

Closing Costs

Closing costs can run at 2% to 3% of the loan amount. The costs do vary from one state to another. This is because of the differences in either the real estate transfer tax or the mortgage stamps. They can also vary based on the different rates charged for attorneys, title insurance, and appraisals. Not only can the closing costs vary by state but also by the lender, due to the many home buying options there are. Each lender charges an application fee that can vary. Some lenders also charge points.

Prepaid Expenses

This is a confusing charge for many homebuyers but it is also necessary. With many mortgages, the lender puts real estate taxes and the homeowner’s insurance in escrow. This means that charges are included in the monthly payment and then paid by your lender when due. For this to happen successfully, the lender needs to collect amounts upfront to make sure funds are going to be available when they need to be paid. Depending on where you live, these prepaid expenses can come to as much as 2% of the loan. An option is to decline this escrow arrangement but in order to do this, you need to have 20% down.

Utility Adjustments

These adjustments can be a large number of charges but they aren’t usually more than a few hundred dollars. These charges represent utility costs paid by the seller in advance. For example, if the seller fills a heating oil tank before the closing then you need to reimburse the seller for the unused oil. This will happen during the closing. Another expense that may need an adjustment is a homeowners association fee. In some neighborhoods, fees are paid on a yearly basis. If the seller pays for these for a full year then you need to reimburse the seller for the months of fees that you are living in the house instead. Since these are usually direct expenses, the seller often doesn’t pay them.

Lender Required Cash Reserves

While this isn’t a closing expense, it can take some homebuyers by surprise. Lenders require that you have some cash left in savings after the closing costs are paid. The lender doesn’t want you to end up in early term default and so this requirement makes sure that you are able to make the payments during the first two months. The most usual cash reserve is two months. This means you will have to have sufficient reserves to cover the first two months of your payments. These funds aren’t going to be deposited with the lender. The lender will verify that you have these funds available. This can include verifying a checking account, savings account, or money market fund balance. You aren’t supposed to have these funds in a retirement account since it’s not a liquid source.

There are two alternatives that can reduce or even eliminate closing costs. You can negotiate with the seller to help pay your closing costs. This is only allowed in areas where this is common. You can also negotiate a price with the lender. This is where you then pay a higher interest rate on your mortgage in exchange for the lender paying the closing costs.

Determining the Cost of Moving

Besides what you need to bring to the closing table, you also need to consider the cost of moving when you go to buy a home. Moving costs can be a shock to some people. Moving can cost as much as $6,000 just for the movers. This also doesn’t take into consideration moving supplies, moving a car, and other heavy items. If you are moving out of state, the costs can be even more.

Figure out how much it costs to hire a moving company in your location and how much it could cost on your own, whether you are moving locally or farther away. Even if you aren’t going to pay for movers, you will still need to consider the cost of a DIY move. Figure out the average cost of renting a truck for a day and the cost of truck insurance for the rental. If you need help with the move, you want to save for the cost of having a POD at the home. Research the most expensive time of year to move. Moving companies may not have a lot of business during winter months since many people may not want to move then. If it works for you, consider moving during a non-peak season to save money.

Ongoing Homeowners Expenses

It’s not just closing costs you need to prepare for when you buy a home but also the ongoing expenses.

Mortgage Payments

Process gettinng a mortgageIt’s important to comparison shop when you are going to buy a home. Your interest rate is going to make a big difference in how much your payment is each month so finding a lender that will give you the lowest interest rate will be important. Monthly payments are the easiest cost associated with buying a house mortgage to predict. However, one mistake that some first-time homebuyers make is thinking that the mortgage is the total sum they will owe each month, just like rent payments, but that’s not the case.

Property Taxes

Taxes are usually paid twice a year but the laws and policies vary by county and state. A real estate agent can give you a rundown before you buy it. Local governments raise taxes in order to cover municipal expenses or projects so you can’t assume that this will stay steady. Increases in the home’s assessed value, whether it’s due to renovations or market conditions, can also cause taxes to rise, which can increase your payment if you have an escrow account with your lender.

Homeowners Insurance

Homeowners insurance can be built into your payment, just like property taxes. You will be required to have this insurance by your lender and the costs are based on a number of things. You can usually lower the cost if you bundle this policy with other insurance policies, such as life or auto.

Mortgage Insurance

If you have a down payment that is less than 20% then you will need to have mortgage insurance. The premium protects the lender in case you default. You can pay this upfront or have the premiums due each month in your mortgage payment. You can cancel this insurance when the remaining principal dips below 80% but for now, it will be an extra cost in your budget.

HOA or Condo Fees

If you are buying a condo or in a planned development that has shared spaces then you will have an extra monthly assessment on top of the mortgage payment. This pays for improvements to the complex or shared amenities, such as painting or landscaping. In a pricy urban area, a condo assessment can almost rival a mortgage payment so it’s important to pay attention to these costs.

Utilities

Once you have finished buying a home you may think you are done with financial hurdles. However, there are utilities, maintenance, and the occasional emergency. Some of these expenses you can budget for while others might surprise you. You may want to pad a homeownership rainy day fund so you have money to cover these problems, such as a water heater breaking. Having money set aside will prevent you from having to take on credit card debt. It’s best to have at least 1% of your home’s value in savings for maintenance and repairs.

Preparing to Buy a Home

If you have decided that you want to buy a home then you also need to convince a lender. This means that your credit will need to be in good shape and you don’t have a lot of debt. Lenders are looking for a variety of different metrics to see if you are too much of a risk to get home. How much you owe compared to how much you earn will also play a role in the approval process. In order to prepare for the mortgage process, you want to check your credit score and take a look at your debt. Do you have a credit card with a lingering balance that you are able to pay off? Little improvements you can make can boost your credit score and allow you to have a better interest rate and save money.

Also, try to do good lender research before you purchase a home. Make sure you are choosing the best option. You can always look for help here, on Loanry! By putting in your information below, you may find out if you qualify for any of the suggested, trustworthy lenders:


Getting the Best Interest Rate

A lower interest rate can save you a lot of money over the life of the loan so it’s best to get the lowest rate you can.

  • Credit Score: If you have found mistakes on your credit report then fix these. If you have time to work on your score then you should since this is a big factor in your interest rate.
  • Debt-to-Income Ratio: Start lowering the debt you have to make it easier to have room in your budget for a mortgage payment. When you pay off debt, you are in a better position to manage your budget and have resources in case you need them for emergency expenses.
  • Down Payment: A bigger down payment means you will get a better interest rate since it shows lenders that you are less risky. If you don’t have a large down payment now but are ready to buy, you may want to consider refinancing in the future. The faster you are able to lock in a lower rate, the more you will save on mortgage costs.

Are You Ready to Buy a Home?

Not only do you need to be financially ready to buy a home but you should be emotionally ready as well. There are some things you need to think about before you buy a home. Does your career mean that you need to have some mobility? Depending on where you live, it can take up to four years to break even and if you have career advancement or promotion in the next five years, will you have to relocate? If you plan on starting a family then you may outgrow your starter home before you know it. You might want to consider something big and look in a good school district.

When you are ready to buy a home, you need to determine the shelf life. How long do you think you will be there? Does your starter home make a good rental property that you can use for passive income in the future? Determine your life’s readiness. Do you have the time to handle maintenance, such as repairs and yard work?

Saving for a Down Payment and Closing Costs

One of the best ways to save for a down payment and the other costs it takes to buy a home is to transfer a fixed amount into special savings account each month. The next step would be to get on a budget and lower expenses as much as you can. Reducing high-interest debt will allow you to reduce your debt-to-income ratio, which helps your credit score and will enable you to put more toward your savings goals. Besides reducing expenses, you may also need extra income, which you can get through a second job or by looking into a side hustle.

There are different down payment assistance programs that you can use if it is just not possible for you to save enough for a down payment. There are other types of loans that don’t require you to save as much for a down payment but you do still need to pay for some of the closing costs so you will still need some money in the bank. While it’s not recommended, you can borrow from retirement in a pinch.

Conclusion

When saving enough for your new home, you need to consider a few things about buying a home. You will need to bring more to the closing table than just a down payment and some of the expenses may catch you by surprise if you aren’t prepared for them. Once you have enough in the bank for closing costs and a down payment then you also need to consider your other monthly home expenses, such as your mortgage payment and insurance. How much you need for your home will depend on different factors, including where you live and what lender you decide to go with for your mortgage.