One of the biggest questions homebuyers have is, “How much money do I actually need to buy a house?”
The answer is not simply your down payment. Depending on the mortgage program and property, you may also need money for closing costs, prepaid taxes and insurance. Other expenses may include inspections and an appraisal.
The good news is that many buyers need considerably less cash than they initially expect. Low-down-payment mortgage options, seller contributions, gift funds and eligible down payment assistance programs may all help reduce the amount of your own money needed for a purchase.
You May Not Need 20% Down
The idea that you need a 20% down payment to purchase a home is one of the most common misconceptions among homebuyers.
Depending on your qualifications and the mortgage program, potential options may include:
- Conventional financing with down payments as low as 3% for eligible borrowers
- FHA financing with a minimum down payment as low as 3.5% for eligible borrowers
- VA financing with no required down payment for eligible veterans, active-duty service members and certain surviving spouses
- State and local homebuyer programs that may provide eligible borrowers with down payment and/or closing-cost assistance
The lowest down payment is not automatically the best financing option. Consider mortgage insurance, interest rate, monthly payment, available savings and long-term plans when choosing a loan structure.
What Are Closing Costs?
Closing costs are expenses associated with obtaining the mortgage and completing the real estate transaction. They are separate from your down payment.
Depending on the transaction, closing costs may include items such as:
- Lender and loan-related charges
- Appraisal and credit-related fees
- Title and settlement charges
- Recording and government charges
- Prepaid homeowners insurance
- Initial escrow deposits for taxes and insurance
- Prepaid interest
The actual amount varies based on the purchase price, loan program, property location, closing date and other factors.
Don’t Forget About Your Earnest Money Deposit
When your offer is accepted, your purchase contract may require an earnest money deposit. This deposit demonstrates your intent to complete the transaction and is generally credited toward the funds you owe at closing, subject to the terms of your contract.
Your real estate agent can explain the customary deposit amounts and contract requirements for the market in which you are purchasing.
Home Inspections and Other Upfront Expenses
Some homebuying expenses may occur before closing and may not be included in the amount collected by the settlement company.
Depending on the property and your contract, these could include a home inspection and specialized inspections or evaluations you choose to obtain.
It is a good idea to account for these expenses when deciding how much cash to keep available during the homebuying process.
Can the Seller Help With Closing Costs?
Depending on the mortgage program, transaction and negotiated contract, the seller may be permitted to contribute toward certain allowable closing costs.
Seller contributions can reduce the amount of cash a buyer needs at closing, but the allowable amount and permitted uses vary by loan program and transaction.
Your loan officer and real estate agent can help determine how a seller contribution may fit into your financing and offer strategy.
Can You Use Gift Funds?
Many mortgage programs permit eligible gift funds to be used toward some or all of a buyer’s required funds, subject to program requirements.
The source of the gift, documentation requirements and the amount that may be used depend on the mortgage program and transaction. If you expect to receive financial assistance from a family member or another eligible donor, discuss it with your lender before transferring money.
Down Payment Assistance May Reduce the Cash You Need
Qualified homebuyers may have access to state or local programs that provide assistance toward a down payment and/or closing costs.
Maryland and Washington, D.C. offer homebuyer assistance programs with varying eligibility requirements, income limits, funding structures and program rules. Availability can change, so buyers should evaluate the current options available when they are preparing to purchase.
Assistance programs should also be evaluated together with the underlying mortgage. The largest assistance amount does not necessarily produce the best overall financing structure.
How Much Money Should You Keep After Closing?
Being able to use a certain amount of money toward a home purchase does not necessarily mean you should use every available dollar.
Homeownership can bring expenses that renters may not encounter, including repairs, maintenance, moving expenses, furnishings and unexpected costs.
Whenever possible, consider maintaining an appropriate financial cushion after closing rather than focusing solely on the minimum amount needed to complete the purchase.
So, How Much Cash Will You Actually Need?
The best way to determine your cash requirement is to evaluate a specific purchase price and mortgage scenario.
A personalized mortgage analysis can estimate:
- Your down payment
- Estimated closing costs
- Prepaid taxes and insurance
- Potential seller contributions
- Eligible gift funds
- Available down payment assistance
- Your estimated total cash needed for closing
That gives you a much more useful number than simply assuming you need a certain percentage of the home’s purchase price.
Buying a Home in Maryland, Washington, D.C. or Virginia?
The Chris Jordan Mortgage Team can help you compare financing options and estimate both your monthly payment and the amount of money you may need to purchase a home.
If you are not ready to buy yet, we can also help you understand what to work toward so you can develop a realistic homebuying plan.
Want to know how much money you may need to buy a home?
Call us at (240) 670-5090 or email us at CJMT@mainstreethl.com.
Loan programs, seller contribution limits, gift-fund requirements and assistance-program eligibility are subject to applicable guidelines and change. This information is for general educational purposes and is not a commitment to lend.
