How Much Cash Do You Really Need to Buy a Home?

Are you ready to buy a home? You’re not alone—in 2019, more than five million people bought an existing home. And that doesn’t even include the number of people who purchased new construction.

The point is, the housing market is always bustling and busy. And if it’s your first time buying a home, it might seem a bit daunting. You might have a couple of questions—how much money do you need to buy a home? And how can you even get those funds?

Overwhelmed? Don’t be. We’re here to guide you towards saving up, so hopefully you’ll be able to afford your dream home. Keep reading to learn more!

How Much Do You Need for a Down Payment?

Let’s start with one of the first payments you might have to make—a down payment. When someone takes out a mortgage loan, they’ll put down a percentage of the home’s price. That’s the down payment.

You might’ve heard that down payments are about 20% of the total cost of your new home. That can be true, but it really just depends on your mortgage. There are mortgage options that require little to no down payment, and how much you need often depends on your eligibility for different programs. Here are some different loan options:

1. USDA Mortgage

The USDA guarantees mortgages for eligible buyers primarily in rural areas. These loans do not have down payment requirements. To qualify for a USDA loan:

• The property must meet eligibility requirements as to where it’s located.
• Your household must fall within the income requirements, which depend on your state.
• You must meet credit, income and other requirements of the lender, though they may be less rigorous than loans not backed by a government entity.

2. Conventional Mortgage

Conventional mortgages are financed through traditional lenders and not through a government entity. Depending on your credit and other factors, you may not need to put down 20% on such loans. Some lenders may allow as little as a five percent down payment, for example. But you’ll have to pay private mortgage insurance (PMI) if you put down less than 20%.

3. FHA Mortgage

FHA loans, like USDA loans, are partially guaranteed by a government agency. In this case, it’s the Federal Housing Administration (FHA). A down payment on these loans may be as low as 3.5%. Requirements for an FHA loan can include:

• You’re purchasing a primary home.
• The home in question meets certain requirements related to value and cost.
• A debt-to-income ratio between 43% and 56.9%.
• You meet other credit requirements, though these may not be as strict as with conventional loans.

How much do you need to make to buy a $200K house?

Given the above information, here’s what your down payment might look like on a home worth $200,000:

• USDA loan: Potentially $0
• Conventional loan: From $10,000 to $40,000
• FHA Loan: As low as $7,000

These are just some options for mortgages with low down payment requirements. Working with a broker or shopping around online can help you find the right mortgage. In addition to the down payment, you do need to ensure that you can afford the mortgage and make the monthly payments.

Don’t Forget the Cash You’ll Need for Closing

Closing costs are typically between three and six percent of your mortgage’s principal. That’s how much you’re borrowing, so the less you put down, the more your closing costs might be.

Here’s a range of closing costs assuming a cost of three percent of the low range home purchase, when buying with less than 20% down:

• For a home purchase between $500,000 and $600,000, you’ll need at least $15,000 for closing costs
• Between $300,000 and $500,000, at least $9,000 for closing costs
• Between $150,000 and $300,000, at least $4,500 for closing costs

Where Can You Get the Money to Buy a Home?

These numbers should give you an idea of how much cash you’ll need for a home purchase. Acceptable sources for procuring cash to close on a house can be one or any of the following:

• Stocks
• Bonds
• IRA
• 401(k)
• Checking/ savings
• A money market account
• Retirement account
• Gift money

The key here is that the money needs to be documented. You have to be able to prove you had it and didn’t borrow it simply for the purpose of making your down payment or covering closing costs.

Don’t have cash available from any of the above-mentioned sources? There are other sources you can use as long as they can be paper-trailed, such as your tax refund or a security deposit refund on your current home rental.

Plan for Other Important Costs

While down payments and closing costs are the biggest out-of-pocket expenses involved in buying a home with a mortgage, you may need to cover other costs. There might be some additional home buying and moving-in costs. Those could include inspections, the cost of any necessary repairs not covered by the sellers and moving fees.

Are You Ready to Buy a Home?

Saving up the right amount of money is just one step in buying a home. You must also ensure your credit score is in order. Lenders look at different credit scores when they consider someone for a mortgage. Sign up for ExtraCredit to get a look at 28 of your FICO Scores to understand how lenders might see you as a borrower. Once you check your scores, you can decide whether you need to build your score or start shopping for your mortgage.