Buying a home is something that many people dream about, but they also often feel it's out of their reach financially. In many cases, you're able to successfully buy a home with far less money in the bank than you may think.
Still, not everyone understands how much money they should have in their cash reserves before they move forward.
Let's explore everything you need to know before you take your first step.Your Down Payment
This will be the most significant out-of-pocket expense that you'll have to put forward when buying a home. Depending on what type of mortgage you're able to secure, you'll need to put down a varying percentage of the home's total value.
For example, those who qualify for a loan from the Federal Housing Administration, only 5% of the home's value is required as a down payment.
In general, buyers will find that a 10% down payment is the most common number that they'll need to work with.
It's worth noting, though, that buyers will be required to purchase private mortgage insurance (PMI) if they put down less than 20%. As a result, many buyers opt to hit this benchmark as opposed to making their minimum down payment.
These are costs that lenders handle on a buyer's behalf, but the buyer is still responsible to pay some of the associated costs.
Outlays can be thought of the expenses that stem from your lender working to help you buy your home. Processing your mortgage, for example, is an outlay cost that you can expect to pay when buying your home.
Insurance costs are handled in a similar manner in that you should anticipate their addition to your total homebuying expenses.
While these costs aren't necessarily exorbitant on their own, they're often significant enough to surprise buyers if they weren't ready to handle them.
The buyer is responsible for paying various utility charges that the seller incurs after the purchase process. For example, water/sewage costs are tied to the property itself and not a specific individual.
This means you may be responsible for a portion of this bill if the seller paid for its entirety after the home was sold.
To elaborate, let's assume the seller pays their utilities for the entire month. But, you and your family close the deal and move in on the 10th of the month.
Even though the utilities have already been paid, it's the buyer's responsibility to reimburse the seller for their portion (based on the percentage of the month the seller still owned the house).
If you're unsure about what costs you might need to take care of, your real estate professional (or the seller in some cases) will be able to point you in the right direction.
Don't Forget About Lender Requirements
This is a nuance that many homebuyers often aren't aware of when looking for a new home.
Many lenders require that buyers have a certain amount of money in their cash reserves after the sale has concluded. The lender takes this measure as a form of protection to ensure the buyer will be able to make the required payments on their mortgage.
Keep in mind, too, that you'll need to have this money after you've paid for all of the other required expenses.
This amount is dependent on a handful of factors, such as your existing debt, your annual income, etc. For instance, a buyer with a high-paying job and little debt may not need as much money in their account as someone who struggles to pay for their monthly expenses.
As such, it's essential that you check with your lender to determine what type of requirements they have in this regard. Otherwise, you may not be able to secure the mortgage you had in mind.
In general, closing costs turn out to be approximately 2% of the total loan amount. As you may expect, this can quickly turn into a large expense for homes that are listed at a high price.
But, these expenses can vary significantly depending on which state you're purchasing your home. For instance, state laws regarding appraisals, title insurance, etc. will greatly influence the amount you'll pay.
Luckily, though, sellers will occasionally contribute to (or take care of) the home's closing costs. This is especially true if they want to sell their home as quickly as possible.
For newer homes, this step often isn't required. For many homes, it's in the buyer's best interest to hire an inspector to check for issues with the house.
If you choose to forego this obligation, you run the risk of moving into a home that has a significant number of issues. If you purchase the home before these are discovered, you'll be responsible for any necessary repairs that need to take place.
Some of these can even be dangerous, such as problems with the property's foundation or wiring.
The good news, though, is that hiring an inspector often doesn't cost more than a few hundred dollars. Regardless, it's still an important expense for those with a tight budget to keep in mind.
So, How Much Do You Need in Your Cash Reserves?
This number is highly dependent on the total cost of your home. It's also influenced by how much money you'd like to put forward as a down payment.
But, we can add up the major expenses to find a general amount:
10% (down payment) + 2% (closing costs) 5% (miscellaneous costs) = 17% total of the home's value.
On top of this, you may need to add more depending on how much money your lender requires you to have in your cash reserves.
Of course, this number can change drastically depending on your state, lender, etc. In general, it's a good benchmark to start from.
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