Yesterday’s post looked at how to save money for a house, but didn’t touch on what your actual target should be. Today, I’m going to cover the back end of things–how much money you’ll need to buy a house.
Go ahead—marvel at the impossibility of actually answering the question correctly. That’s okay, we’re going to try anyway.
Deposits, down payments, fees, and the rest of the lot vary from locality to locality, and as a result of purchase price, financing type, bank, and about 100 other variables. Generally speaking though, you can expect to save for some of the same things we are, which are:
- Down payment amount. Usually varies from 3% to 20% of the sales price, depending on financing type, credit, and other factors.
- Application and related fees. Includes fees to apply for a mortgage, put down deposits on homes we like, and inspect homes (potentially with some bad results). $1,000-$2,000 should do the trick.
- Closing costs. A general term that covers everything from doc stamps to survey fees, bank fees, research, title insurance, inspections, and other items. Your realtor is a good source for an estimate, which we put at 3-5% of the purchase price.
- Points. If you’re planning to pay points to lower your interest rate, that will take some up-front cash. The most points you want, the more cash you’ll need.
- Escrow items. Insurance and tax costs are often held in escrow by the bank throughout the year and have to be pre-paid for 3-12 months at closing. Again, this varies based on location and price, among other things.
- Reserves. Many banks will ask to see that you have at least a few months of mortgage payments sitting in the bank. You won’t have to “spend” this at closing, but it needs to be saved up just the same.
- Moving costs. Most of my moves have been within 10 miles of my last home, but there were always moving expenses involved.
- Initial repair/maintenance costs. Even a seemingly perfect house will start showing its age after move-in, and that’s a bad time to be short on cash.
Whew–I think I got it all. With a list like that, it’s no wonder people give up, frustrated and bitter. But not to worry—if you missed yesterday’s post, read about how to save money for a house and get started today!
Example: A $100,000 Home
Let’s go through a quick example and put pen to paper. For simplicity’s sake, let’s assume I’d like to buy a house for $100,000, and that with my credit history, I’ll be putting 10% down. Here’s my estimate for what I will need:
- Down payment: $10,000 (10% of sale price)
- Application fees: $1,500 (estimate)
- Closing costs: $4,000 (4% of sale price)
- Points: $0 (not planning on adding points)
- Escrow pre-pay: $3,000 (taxes and insurance are both high in my area)
- Reserves: $3,000 (about 3 months of payments)
- Moving costs: $500 (we’re not moving far)
- Initial repair/maintenance: $5,000 (comfortable amount)
Total damage? $24,000, or nearly 25% of the purchase price! This demonstrates that while most people tend to focus strictly on saving for the down payment, it’s everything else that can really drive up the cost of a home purchase.
The costs are not perfectly linear as the price of a house goes up, but they’re close enough! With a few exceptions like the application and moving costs, all of the expenses will increase as a house gets larger and more costly.
If you’re thinking about saving for a home, take a minute to calculate your probable cash needs and take steps to figure out how you’ll get there.
Fiscal Fizzle 
What’s your opinion of rolling closing costs into the mortgage if the lender allows it? I know you’ll have to pay interest on that amount, but at least it reduces your out-of-pocket cost.
Second, I’ve read somewhere that if repair costs exceed 5% of the home purchase price then the lender may not give you the mortgage. Are you suggesting that you should have that much cash (5K) on hand for repairs NOT found by the inspector?
Thanks for your time and answers. Great post yet again!
Austin
Austin–interesting question, to my knowledge, repairs or my inspection results are none of my lender’s business, the only thing that is would be an appraisal (which in theory would account for those). But even if they were, I’m thinking of other things–for example–painting the walls, upgrading the old A/C unit, getting a new kitchen faucet, replacing the broken garage opener, etc…there’s so many things when you move into a new place. If you have bigger issues to deal with (needs new roof, walls falling out, etc.), that’s a whole separate line item in my book. Plus, you’re exactly right–there may be things that pass inspection but fail the day after closing, in full Murphy’s law fashion. I just want the cash on hand to deal with it.
On rolling closing costs in, I don’t have an issue with it if you’re short on cash. If you have a motivated seller, you can also get them to pay for some of it, but in my experience, that lowers your negotiating leverage for the price because the seller sees more money out of their pocket. Also, I think there’s a limit of something like 2 or 3% of the purchase price that they can cover.
P.S. If repairs account for more than 5%, thereby lowering your appraisal by 5%, then I can see the lender refusing a mortgage, as long as the loan amount starts to exceed the value, etc… That makes sense.
First off, these posts are amazing and have really opened my eyes to the costs of buying a home. I’ve been solely looking at down payment and insurance, but to be slapped with a bill for 25% of the home purchase is really awakening.
These posts of repair costs are also interesting. I was watching Holmes Inspection on the HGTV channel last night, a recent addiction of mine, and the Holmes team ended up repairing $150,000 worth of damage on a “newly renovated” (aka flipped) old home in Toronto. Little did the home owners know that they had bought a lemon and an entire section of the home needed to be rebuilt from the foundation up! It’s really interesting, but really scary all the same.
Yeah, very scary, and hopefully rare. I don’t see how you can really “plan” for that, it just takes a good inspection and the luck of the draw. Thanks for the compliment, btw, I’m glad we’re getting everything out there so we can really start planning for everything.
The better question today is should you buy a house at all. Even in pure dollars and sense, it doesn’t make sense in most areas. People here seem to be smart enough to do rent vs buy analysis. However, what no one seems to include in calculation is the option value of flexibility. When working for someone else, being able to capitalize on employment opportunities is a whole lot easier when you are renting and can leave with 30 day notice and no house to sell. With flexibility, one should be able to grow their income at 7-10% vs 3-5%. At 3%, you will be making 2.4x your current salary in 30 years. At 7%, you will be earning 7.6x your current salary.
True–it’s all about deciding on your priorities. I would not buy a house I didn’t intend to stay in for 10 years, and right now, I do.
I love the http://www.smartypig.com recommendation, Wojo! I signed up and am starting small.
Excellent! Let me know how it goes–I’d love a first-hand account of how it’s working for people.
What a great list. I never realized the true cost of a home purchase. I’m looking to buy my first home within the next year or too so this will definitely be good for me.
I’d love to hear from some people who have actually purchased a house (or houses), and whether they really find themselves paying this much. It seems to me that most people save up the amount of a down payment, plus a few thousand extra to pay closing costs. I have never read of anyone saving up a down payment PLUS 15% of the cost of the house.
If so many people are unprepared to pay these costs, then how do they get paid? What really happens at the time of closing?
Side note–the Wallet Pop calculator suggests $5,500 for my closing & escrow costs, which is a bit lower than I estimated. Of course, this excludes the last three items (reserves, moving, etc.), which together account for over 8% of the purchase price.
I’m not suggesting those last costs are required–but it’s something I’m going to require for myself before I go forward with buying a house. I’m equally curious to hear real-life example of people who have gone through the process. Thanks!