Most of us, when we set the goal of buying a house, often come up with this question. Unfortunately, there is not a fixed amount that you need to have in order to buy a house, since there are several factors that affect the final amount such as the cost of the house, the type of mortgage product you choose, the type of insurance you need, etc. However, there are three main factors that you need to consider when thinking about the costs behind buying a house: earnest money, downpayment, and closing costs.
Closing costs are the costs of the legal documents and procedures to transfer the home over to the new owner. They typically range between 2 and 7 percent of the price of the property, depending on when and where you purchase your home. They include the various fees charged by the mortgage lender as well as local and other taxes plus escrow deposits. The downpayment is also paid at closing.
The earnest money is the amount of money the person interested in buying a home puts down to show that they’re serious about purchasing a house. Usually, the earnest money you paid as a deposit with your purchase offer is applied to the total amount of the down payment and closing costs.
It is strongly recommended that you make a downpayment of 20% of the property in order to avoid extra costs. For example, if the house you choose costs $500,000, the 20% downpayment should be $100,000– money you need to have when you sign the mortgage papers to borrow the money to finance the total cost of the house. In the case that your down payment is lower than the percentage accepted by lenders, 20%, mortgage insurance is required by the lender. This insurance protects the lender in case you stop paying your mortgage.
The earnest money, closing costs, and down payment are generally the most important elements you need to think about before buying a house. Based on the price of the property and the mortgage product you choose, you can have an idea of the amount you need to save in order to cover upfront expenses. Nonetheless, you will also need to consider ongoing monthly expenses such as the mortgage, insurance, property taxes, HOA, utilities, repairs, etc. We strongly suggest that you create a realistic budget sheet, where you can keep track of your income and expenses, that allows you to see how much you can afford. [download budget sheet here]