How much money should I save before buying a house?

Probably the most asked question by any home buyer that hasn’t bought a home in recent years is; How much money should I save before buying a home? The answer to this question, isn’t straightforward but is also not that complicated. A lot of this has to do with the type of loan that you are requesting. So, let’s start their first.

Loan types

Different types of loans, require a different amount of money down. Now within a loan type there are multiple options that won’t be discussed here, I will talk about the most common options. I would recommend to reach out to your lender if you would like to know what option is best for you.

VA Loan:
Down payment: 0% required
Closing costs: 2.5% – 4%
Total: 2.5% – 4%

FHA Loan:
Down payment: 3.5% required
Closing costs: 2.5% – 4%
Total: 6% – 7.5%

Conventional loan 97:
Down payment: 3% required
Closing costs: 2.5%-4%
Total: 5.5% – 7%
(Loan size may not $510,400, and the property must be a single-unit dwelling)

Conventional Loan:
Down payment: 5% (Most Typical)
Closing costs: 2.5%-4%
Total: 7.5% – 9%

The big 20% myth

As you can see for none of these loans you need the famous 20% down. Why is it, that we always hear that you need 20% down? Well, that’s because of the Private Mortgage Insurance (PMI). The PMI protects the lender in the event of a foreclosure. You don’t have to pay a PMI if you have a loan-to-value (LTV) ratio of 80% or lower. The cost of a PMI shouldn’t be a reason not to buy, since in many cases this is insignificant in the whole picture. While you are saving for a home, the home prices are going up. This means that it might be smarter to go with a lower down payment for now and pay the PMI. Over time you will get to the 80% LTV and don’t have to pay for the PMI.

 

Earnest Money

Earnest money is a deposit made to a seller, that represents a buyer’s good faith to buy a home. The earnest money could be any kind of amount. But the more earnest money you deposit, the stronger an offer will be. Keep in mind that in Washington state the seller, in most cases, cannot keep more than 5% of the earnest money if you back out of the deal without a valid reason. A good amount for the earnest money is typically 3%.

On the day of closing the earnest money will be used towards the loan, either for the down payment, the closing costs or a combination. Any excess earnest money will be returned to you.

Inspection Costs

Upon buying a home, it is always smart to do an inspection. The inspection prices are based on square footage, but a good rule of thumb is that it would cost around $500 USD to do an inspection. This might be higher and this might be lower in some cases. It would also be wise to save up for more than one inspection in case you need to add additional inspections.

 

As you can tell, depending on your situation you might be able to buy a home with only 2.5% of the purchase price. But in most cases 7.5% – 9% would be a good rule of thumb to aim for. But to be completely sure, talk to your lender first to see what your situation is and to develop a plan so that you know how much money you should save before buying a house.

Looking for a lender or just want to talk about buying or selling a home? Contact me!

Posted on June 9, 2020 at 9:00 am
Dylan Wolf | Category: Uncategorized

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