How Much Do I Need to Buy A House?
Let’s talk about the elephant in the room when it comes to buying a home. How much do you really need to buy your FIRST house?
Money talk doesn’t have to be boring! Before we start making it rain, let’s talk about a few fun facts. If you buy a Starbucks Latte every day for a year you will spend around $2,190. Dinner out these days roughly costs $20 a person (on the low end). If you eat out 3/4 of the year you will likely spend $5,475. That’s just on dinner! Throw in lunch and you’re spending another $4,100. So in one year having Starbucks coffee for breakfast, a $15 lunch (3/4’s of the year) and a $20 dinner (3/4’s of the year) you will spend $11,765. Shocking, isn’t it? What if you could take that same amount and buy a house? Save it for one year (or go for 2) and you will be owning your very OWN home.
Calculating Down Payment
So how much do I really need? Well that’s where it get’s a little sticky, so we figure go big or go rent. 😉 If we help you plan for the WORST case scenario then you’ll love us when you can get into a new home for much less.
Cash to close is another term for the amount you will need to cover the down payment AND the closing costs but oftentimes a first time home buyer is confused and they roll in both together to call it a downpayment. A downpayment is actually the required amount of cash a buyer must bring to the closing to obtain a mortgage. Down payments vary per loan type, loan product, and credit score but there is a baseline. We’ll focus on that now.
For now, let’s pretend you are buying your 1st home at $300,000 purchase price.
Typical* down payments per loan type:
- VA- ZERO Down
- FHA- 3.5%
- Conventional 3%
* Note that we said typical. Don’t shoot the messenger if they require more down due to it being a secondary residence or because you are buying a higher priced house, or your credit is a little dicey.
** Now if you put less than 20% down you’ll be paying a little more for that loan (like Mortgage Insurance) but if you’re cool with less cash up front, then let’s work through this together.
Down payment for a $300,000 house at 3% is $9,000. Moving on…
Calculating Closing Costs
So what exactly are closing costs? Those are the fee’s charged by the lender, title, taxes, pre-paid HOA fee’s, homeowners insurance, and escrow company and vary per company. This one get’s a little stickier since it depends on many factors that vary per situation and loan product. Some buyers may have higher closing costs, some may have ZERO closing costs because the seller picks up the tab. If the market is HOT and you need a little help with this side of the cash to close, then make sure your offer is sweet enough that the seller will be convinced that they can help you with it. (Offer higher than asking price and roll in closing costs). Your agent can guide you on the best way to present this in an offer. Also let’s talk about the how the agent gets paid. The sellers agent will typically list the commission they will pay the buyers agent in MLS but if you signed a buyer broker agreement and agreed to pay them 3% and the listing only offers 2%, you’ll be responsible to fork up the extra 1% to pay the agent.
Whatever your situation is, let’s just focus on the Typical* closing costs on a $300,000 home.
Closing costs are usually around 2.5%.
Closing costs for this $300,000 house at 2.5% is $7,500
Next up…
Don’t Forget the Earnest Deposit, Inspection, and Appraisal
This is not a “set it and forget it” until closing process. So if you’re waiting for that big bonus or tax return to cover your cash to close, make sure you have a little cash set aside BEFORE that day.
EARNEST: Within 48 hours of the offer being accepted, the buyer needs to deposit their Earnest Money. Earnest money is the cash that you deposit with the Title company (in AZ) to show you’re legit and serious about buying the house. This is a negotiated number but the stronger the Earnest amount, the more serious a seller will take you. In strong seller markets we encourage clients to put down at least 1% as Earnest.
INSPECTION: You will never hear us say “skip it” because it is probably one of the most important steps. If you are buying a house please spend the money to get it checked by a qualified inspector. A termite and home inspection will cost between $350-$450. It is money well spent if they find something major is wrong. Buyers get a chance to negotiate repairs or a credit in lieu of repairs, so don’t give up that chance.
APPRAISAL: The appraisal is often required to be paid for prior to closing. This is usually around $500-$600.
So using our scenario above for a $300,000 house you will need 1% for Earnest- $3,000 (this gets applied to your down payment at closing), $450 for an inspection and $600 for an appraisal. So in this scenario you would want to make sure you’ve got $4,050 ready to go when you write the offer.
Let’s tie it all together…
Summary
To sum it all up. If you run through the scenario above you will need
Day 1: $3,000 for the Earnest
Day 3: $450 for an inspection
Day 10ish: $600 for an appraisal
Closing Day/AKA Day 30: $6,000 for Down Payment and $7500 for Closing Costs for a total of $13,500. (Don’t forget the down payment was originally $9,000 but the Earnest is applied to cover $3,000 of that).
So when it’s all said and done you can get into your new home for UNDER $18,000 and that’s without asking for any help from the seller.
Now let’s go buy a home! 😉
If you have questions or would like us to work through your specific situation, call or text Lindsay at 602.753.9238.
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