How Much Money do you need to Purchase your First Home?

Are you wondering how much money you need to buy a home for the first time? In this article, I’ll be sharing exactly how much you need, and don’t worry it is not 20% as many believe.

So, let’s dive into it right now!

When it comes to buying a home, it can feel a bit intimidating to know how much you need to save and where to find that information. But you should know, you’re not expected to have all the answers yourself. To get you started, here are a few things you should plan for along the way.

1. Down Payment

As you set your savings goal for your purchase, your down payment is likely already top of mind. And, like many other people, you may believe you need to set aside 20% of the home’s purchase price for that down payment – but that’s not always the case. The National Association of Realtors (NAR) says:

“One of the biggest misconceptions among housing consumers is what the typical down payment is and what amount is needed to enter homeownership. Having this knowledge is critical to know what to save . . .” The good news is, that you may be able to put as little as 3% (or even 0%) down in some situations and there are also some down payment assistance programs available.

I recently spoke with my trusted lender, and he indicated that when you have a 700 credit score and above you can put as little as 3% down. So, if you are trying to buy a $300,000 home your down payment will be $9,000. If your credit score is less than 700 then you can apply for an FHA loan (Federal Housing Administration Loan) which is government-backed or insured. Because they are insured, banks are more willing to loan money to homebuyers with relatively low credit scores and little cash to put down on the purchase.

The other type of available loan is the Veterans Loan which finances 100% of your loan and of course, you won’t be needing a down payment. There are certain requirements for this type of loan that I’m planning to talk about in a future video.

Now there are some down payment assistance programs available mostly for first time home buyers. Those can range anywhere from $8,000 to $12,000.

The are also down payment assistance programs for nurses, teachers, firefighters, and policemen that do not require for you to be a first-time home buyer, just that you currently do not own a home.

2. Earnest Money Deposit

Another item you may want to plan for is an earnest money deposit. While it isn’t required, it’s common in today’s highly competitive market because it can help your offer stand out in a bidding war.

So, what is it? It’s money you pay as a show of good faith when you make an offer on a house. This deposit works like a credit. You’re using some of the money you already saved for your purchase to show the seller you’re committed and serious about their house. It’s not an added expense, it’s just paying some of that upfront.

Your earnest money can be between 1 to 3% of the home sales price. So, for a $300,000 home, you could use the earnest money of $3,000. If you want to know everything there is to know about earnest money, make sure to watch this video where I explain how it works and how to get it back.

3. Closing Costs

The next thing to plan for is your closing costs. The Federal Trade Commission (FTC) defines closing costs as:

“The upfront fees charged in connection with a mortgage loan transaction. …generally including, but not limited to a loan origination fee, title examination and insurance, survey, attorney’s fee, and prepaid items, such as escrow deposits for taxes and insurance.”

Basically, your closing costs cover the fees for various people and services involved in your transaction. NAR has this to say about how much to budget for: “A home costs more than just the sale price. For example, closing costs—which make up about 2% to 5% of the home’s purchase price—are a major added expense…Lenders provide a Closing Disclosure at least three business days prior to closing on a mortgage. But buyers will need to budget for these added costs ahead of time to avoid sticker shock days before closing.”

Let’s continue calculating your expenses in the purchase of a $300,000 home.

If you obtain down payment assistance your expenses will be $8,000.

Closing costs include:

Lender fees:

? Processing fee

? Underwriting fee

? Wire transfer fee

? Prepaid interest

? Appraisal fee

? Credit report fee

? Mortgage insurance premium

? Homeowners Insurance

? Property taxes

Title charges and escrow:

? Title insurance

? Title settlement fee (paying lawyers for his services)

? Title search

? Deed preparation

? Recording fees

? Miscellaneous:

? Home warranty

? Homeowner’s insurance

The main point is that wise buyers anticipate these expenses beforehand, ensuring they are well-prepared for the process. Freddie Mac encapsulates it succinctly: “If you’re in the market to buy a home, your down payment is probably top of mind. And rightly so – it’s likely the biggest cost of homebuying. However, it is not the only cost and it’s critical you understand all your expenses before diving in. The more prepared you are for your down payment, closing, and other costs, the smoother your homebuying journey will be.”

Knowing what to budget for in the home-buying process is essential. To make sure you understand these and any other expenses that may come up, let’s connect so you have reliable expertise on what to expect when you buy a home.

If you're considering purchasing a home and want to ensure everything is in order, follow my articles where I'll discuss common pitfalls to avoid when buying a home with a loan.

If you're relocating to Columbia or nearby areas, reach out to me. I publish new articles every Monday about life in the Palmetto State, and I also share videos on my YouTube channel. Looking forward to connecting with you next week!

Author: Sandra Sturkie

Graphic Designer: Merryl Moore