So, you have decided to take an important step and invest in your future by buying a home. Well, congratulations on making such a big decision! Owning your own property can be one of the most rewarding decisions you can make. A place to call your own, an asset, and an investment in your future; there is nothing like knowing that your house belongs to you (and you no longer have to waste money that you will never see again paying rent).
While being a homeowner is a rewarding experience, the process of buying a house can be stressful and unpredictable, particularly if it is your first time as a buyer. While your real estate agent should be glad to hold your hand throughout the process and ensure you understand what is going on, many people find themselves in over their heads at some point or another. And let’s face it; the costs associated with buying a home make it a BIG expense.
It is generally understood that there will be plenty of expenses associated with the purchase of real estate. Still, too often, there are hidden costs that come as a nasty surprise to a potential buyer. So, if you are wondering how much to save for a house, here is a comprehensive rundown of what you can expect to splash your cash paying for.
How much house can I afford?
One of the first steps in the homebuying process should be figuring out how much house you can afford. Generally speaking, you can spend 28% of your gross income on housing expenses, which means that if you have an average income of around $60,000, you can afford $1,400 in monthly housing expenses. This means that with a $60,000 income, you can afford a $200,000 mortgage on a 30-year loan with a 3.75% interest rate.
How much money do I need to buy a house?
Depending on your situation, you can even buy a house with zero down, although it’s more common to see down payments in the 3% to 10% range. That being said, even if you find a 0% down payment, you’ll still need between 2-5% of the purchase price to cover closing costs and other expenses.
How much money should you put down on a house?
Your biggest expense as a buyer is, in most cases, going to be the downpayment. Too many people rule themselves out as potential homeowners, thinking they can not afford to own property because they do not have the financial freedom to save tens of thousands of dollars to put down on a home. If you are one of those people, the good news is you thought wrong!
Gone are the days when it was expected that you put down a whopping 20% on a house. While a larger down-payment equals lower monthly payments, it is (fortunately) not an absolute necessity these days. It is even possible to buy a home with a 0% down-payment, particularly if you are a first-time buyer. However, having some cash set aside for a 3% or 5% down-payment can help to strengthen your offer. The amount of money that you put down on the house often depends on the type of mortgage that you get. Let’s take a look at the most common mortgages that allow for low down-payments:
FHA Mortgage
The FHA stands for the Federal Housing Administration and is a federally funded loan. This type of mortgage is offered by approved lenders and is a common and popular option for first-time home buyers. Down-payments with FHA loans can be as little as 3.5%. Even better, you can apply for a grant for down-payment assistance, which (if approved) when combined with an FHA loan can allow you to buy a house without putting down any money of your own. There is a minimum credit score requirement of 580 to qualify for the lowest down-payment options. Scores between 500 and 579 can still qualify you for an FHA loan, but 10% down will be required. It is also important to note that FHA loans come with certain restrictions not found with conventional mortgages (for example, you may not be able to purchase an older house with an FHA loan).
USDA Mortgage
The United States Department of Agriculture allows people to purchase homes in less industrialized areas with little or no-down-payment. These loans are available to buyers with low to moderate-incomes compared to other households in the area and require those interested in applying to pass an eligibility check. Eligibility depends on both the buyer and the property; the home must be in a qualified area, and the buyer must meet the necessary income caps.
Conventional Mortgage
This type of loan is exactly what it says; conventional! These more traditional mortgages usually ask for a down-payment of at least 5%. However, recently, down-payments of as little as 3% can be accepted, but please note, the standards for being accepted with a 3% down payment are stricter. Furthermore, the 5% down-payment rate has a cap that prevents the purchase of a home that exceeds $417,000. If you want to buy a more expensive house, expect to put down a minimum of 10% with a conventional mortgage.
How much are closing costs?
There are two things that a buyer knows they will likely have to fork out for: down payments and closing costs. Closing costs are essentially the fees associated with the closing of your home loan. There is a lot of variation in what these fees will entail depending on where you live, the type of loan you have, and the property you buy. But typical closing costs will include the following:
- Applications Fees
- Closing or Escrow Fee
- Escrow Deposit (for property taxes and mortgage insurance)
- Homeowners Insurance (first year often paid at closing)
- Origination Fees
- Transfer Taxes
- Underwriting Fee
- Recording Fee
Because closing costs vary state to state and include so many different aspects, the easiest way to budget for them is to expect to pay roughly 3% of the sale price of the home. According to a recent survey, the average amount that buyers spend on closing costs is $3700, but it is not uncommon to pay up to $8000.
While you should budget paying closing costs when you’re figuring out how much to save for a house, there is always the chance that you can get the seller to cover these costs for you. Often, your real estate agent will be able to negotiate that the seller pays the fees associated with closing for you to be able to purchase the home. In these scenarios, the closing costs are usually rolled into the asking price of the house, allowing you to skip paying them in cash upfront at the time of closing.
Beyond the obvious down-payment and closing costs, there are several hidden costs associated with buying a home. These are generally what take first-time homebuyers by surprise, and should be considered when you’re budgeting your expenses. Consider the following when determining how much to save for a house:
Agents Fees and Commission
Sometimes, buyers do not consider their buyer’s agent fees and commission as an expense because it is commonly known that the seller foots this bill. However, that does not mean that you should not consider this. While you may not pay cash out of pocket to cover agent fees upfront, sellers will, more often than not, include the expected expense of paying commissions into the sale price of the house. So, while you may not feel like you are the one paying, you will likely end up covering this cost in the long run.
HOA Dues
If you’re considering buying a townhouse or condominium, or a house that falls within the jurisdiction of a Homeowners Association, make sure you can afford the monthly fees. These typically fall somewhere in the range of $200-$400 a month but can get considerably more expensive depending on the property and the area. HOA fees are most likely to be a mandatory expense. They should not be overlooked, as once you purchase a property governed by a Homeowners Association, you are legally obligated to pay the dues. You can also expect to pay some form of HOA transfer fee when initially purchasing the home.
Insurance
You may be used to paying renters insurance, but owning a property comes with lots of different (and sometimes expensive) types of insurance that are required. These typically include homeowners’ insurance and title insurance, not to mention if you live in an area that is prone to natural disasters. If, for example, you live in a flood zone, you should expect to pay even more to cover flood insurance
Property Taxes
As if you did not wave goodbye to enough of your paychecks as it is, owning a home means paying property tax, which is not a flat-rate tax and can quickly add up. Property taxes are typically re-evaluated annually by a tax evaluator. It is important to remember that property taxes are not static and will change over time, especially if you make renovations or the value of your home increases.
Home Inspections
The price of a home inspection will likely be the first cost you pay after your down-payment. Before you close, you’ll want to get the property thoroughly inspected; this isn’t a step to skip out on! As a matter of fact, most mortgage companies will require that you get a home inspection before they agree to finalize your loan. You don’t want to move-in to your beautiful new house only to realize too late that it needs a new roof, or you have a termite infestation.
At the very least, you will want to schedule a general inspection (which will cost you a few hundred dollars). If a termite inspection is not incorporated into the general inspection, it is worth paying extra to include one. Depending on the age of the home, you may also want to consider having the sewer system inspected. All these costs can quickly add up to $1000, so make sure to budget accordingly.
Maintenance and Repair
You may be able to get away with having the seller cover the cost of any repairs found in the home inspection, but maintenance does not end there. Once you own a home of your own, you are responsible for keeping it in shape, and repairs can be costly. You should take future maintenance into consideration when deciding to buy a house. Take a look at the home and consider things like the costs of landscaping. Are there large trees on the property? If so, tree pruning and removal can easily cost thousands of dollars annually. If the home is older, consider the age of any included appliances or the water heater, for example. The roof may be in good shape now, but how long will it be until it needs replacing? These are all factors worth taking into account, as they may break the bank somewhere down the road if the price of maintaining them is beyond your budget.
Prepare for Increased Bills
In all the excitement that comes with moving into a bigger house, it is easy to overlook quickly escalating monthly bills. You most likely will have prepared yourself for a more expensive monthly mortgage payment, but do not forget about the increased costs of electricity, water, and gas. Furthermore, many people who move from renting an apartment to buying their own home overlook utility bills such as trash removal, because these are usually covered when you pay rent. Typically, homeowners pay a few thousand dollars extra annually in bills than renters do.
Buying a home is an exciting journey, and one that everybody should get the chance to experience. For most people, their home is their pride and joy, not to mention their biggest asset. But the process becomes considerably less enjoyable when unforeseen expenses crop up, leaving you worried about how you are going to afford not only the initial purchase but all the other costs associated with buying a home. The best way to prepare yourself is to comprehensively breakdown all potential expenses and fees and prepare a generous budget that encompasses them. The more prepared you are, the more exciting and enjoyable your homeowner experience will be.