Many people are looking to purchase a house as their next big life goal. But before you start saving up for that down payment, it’s important to know how much money you should have saved up beforehand.
There is no one-size-fits-all answer when it comes to this question; the amount will vary depending on your financial situation and what type of mortgage you’re considering.
This blog post talks about the different types of mortgages and the minimum required savings needed in order to qualify for each one!
How Much Cash Does A Home Buyer Need to Buy a House?
If you’re a home buyer, you’re no doubt going to hear about how much cash you’ll need to be saved up before buying a house.
It is a standard recommendation to have at least 25% of the total cost of the house in cash for a down payment, closing costs, and moving expenses when purchasing a house with a mortgage. When you buy a $250,000 home, you can expect to pay more than $60,000 to cover all of the expenses involved in the purchase.
For example, a home priced at $250,000 should have at least 20% of the total price set aside for the down payment. In this example, the buyer should have around $50,000 to cover this cost. For the closing costs, the buyer should cover over 4% of the total price, which should be around $10,000. For the moving expenses, the buyer should have set aside at least 1 or 2% of the total cost, which should be $1,300 of the total cost.
Basing on this example, a home buyer hoping to buy a home priced at $250,000 should have at least 25% of the total price of the home saved to cover most of the common costs.
If the typical home buyer is hoping to buy a home averaged at $250,000, they should have at least 25% saved up to cover the down payment, closing costs, and moving expenses.
Although this is just an idea of how much the typical home buyer should have reserved for this home purchase. Ideally, a home buyer should also have cash reserved for the real estate fees, lender fees, and other fees that may come their way, just in case.
Aside from the down payment and closing costs, a home buyer should also save up cash for additional fees in the home buying process.
Here are a few examples of additional fees:
Real estate fees
Home Inspection fees
Other possible home buyer fees.
The amount of money you should save up before purchasing a home is very dependent on your financial situation.
First, determine which type of mortgage lender best suits your needs: a bank or credit union – these are more likely to require higher down payments; FHA loan safety insurance for low-income buyers who may not be able to make the high down payments; or a private lender.
How Much Should You Earn Annually Before Buying a House?
If you’re employed with a well-paying job, but your income is volatile (such as in the case of freelance work), it’s advisable to wait until your career stabilizes before applying for a mortgage.
Mortgage lenders will look at how much money you make, and if they see any large fluctuations, they’ll worry that there may be a financial issue on the horizon.
If you are at an income level that is considered “middle-class,” it’s recommended to save up around 20% of your annual salary before buying a house – this means if you make $60,000 per year, you should have saved up about $12,000 in one year (or $200 per month).
Here are some other reasons to save up before buying a home:
You’re more likely to buy what you can afford, rather than getting into an expensive mortgage and then finding out after the fact that a property is too much for your budget.
Down payments will help lower your monthly mortgage payments.
You’ll be able to save more money for the future because you won’t need to allocate all your income toward mortgage costs.
You’ll have a better chance of qualifying for home loans with lower interest rates if you have a larger down payment (around 20%).
Securing an adequate amount of cash is one of many factors that most middle-class families should consider before purchasing a home.
Is It Possible to Buy a House Without Savings?
A home buyer who doesn’t have any savings can still buy a home under a special mortgage loan. Lenders can give home buyers a no-down payment house loan, but they will need to have the requirements that mortgage lenders require.
Mortgage lenders will look at your monthly income and how you make small payments like student loans, credit card payments, and etc. Your debt-to-income ratio should not exceed a certain percentage.
The debt-to-income ratio is a very important factor to lenders. The DTI ratio is a method of determining your mortgage payment affordability by comparing your debt to your income.
DTI ratios exceeding 43% are usually deemed unacceptable by mortgage lenders.
With a salary of $46,000 a year, you would pay off half of your debt with your paycheck.
With that in mind, your gross monthly income is $3,833, while $1,916 is consumed by debt payments.
At this point, no mortgage lender will approve you for a house loan.
Can I Have Debt and Still Buy a House?
Yes, you can have debt and still buy a house. You just need to make sure your DTI ratio is not exceeding 43%. If it does exceed that number, then lenders will likely decline your application for the mortgage loan.
You should also make sure that your credit score looks decent enough to prove that you are a good payer. Your credit score also affects how much lenders will offer you for a loan and what interest rate you’ll be paying.
It’s also important to make sure that your mortgage budget would not exceed 28% of your monthly income – this is what lenders refer to as “affordable.”
How Do I Know if I Can Afford a House?
In order to know if you are able to afford a house or not, you should check your budget, debt, income, and expenses.
The standard rule is to remember that a monthly mortgage payment should not exceed 28%, and your other debt and expenses should fall within 36% of your gross monthly income.
Contact Shield My Deal if You Are Ready to Buy Your Own Home
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The process of finding a home can be overwhelming, but the good news is that it doesn’t take long to find your perfect place! Let Shield My Deal help you start looking for your dream home today!