So you are wondering, How much money do I need before I buy a house? This has been always daunting especially for first-time house buyers. When you think about your budget, you can feel a bit frustrating since home prices are hitting high across the country. Despite the challenges, purchasing a home can assist you to build equity and escape renting. Here we are going to discuss some of the key budgets in making homeownership a reality
Breaking down the prices of purchasing a home
Whenever you are considering the home price tag, it is essential to calculate the 3 main expenses that you require to cover. These expenses include:
- Down payment
This is the money that you can manage to pay when purchasing a home. But for reference, we recommend you to make down payment of 20% of the total amount of the house price allowing you to evade paying mortgage insurance- a type of insurance that guards your lender against losing the money if you fail to make your house payment.
The down payment that is below 10% is very low but government-insured programs such as USDA, VA, and FHA make it simple to purchase a house with a small amount to nothing down. However, going that path may lead you to pay extra in fees and interest hence you will spend more on your overall financial plan.
- Closing costs
Normally, buyers pay around 3 to 4% of the mortgage price in closing costs. These fees refer to money for services that assist to formally close the deal on a house. It includes third-party and lender fees, which comprises title search fee, application fee, origination fee, credit report fee, appraisal fee, underwriting fee, and title insurance. If you do not have money to pay closing costs, then you can ask the lender about the no-closing-cost choices. Some lenders will accumulate all the expenditures into the total loan.
- Mortgage payment
As you are figuring out the amount of money you require to purchase a house, it is important to know the amount it will cost you each month. This is one of the most anticipated ongoing costs. You can easily use a calculator to know how much you will be paying per month. For instance, if you have a loan of $240,000 and you have agreed to finance it for 30 years, at a fixed rate of 3 percent, then you will be paying $1,011 in monthly principal.
Your rates of the mortgage have a high impact on your monthly payment, which makes it vital to shop with several lenders for you to have the best mortgage rates.
How to prepare to purchase a home
Let’s look at some of the steps you should take to get ready to buy a home.
- Check your credit score
Most mortgage lenders will use your credit score to determine your credit eligibility. There are 3 major credit reporting agencies that will let you know your credit score, which include TransUnion, Experian, and Equifax. There are also many services available online that provide credit scores for free.
- Create a budget
Depending on the above cost, you need to create a realistic budget. Many professionals suggest following the 28/36% rule which recommends that you spend no more than 28% of your monthly income on housing and no more than 36% in total on debt.
- Save for down payment
You need about 3 percent of the home’s purchase price as a down payment. Remember, you need a minimum 20% down payment to avoid paying mortgage insurance.
- Find a lender
It is helpful to get pre-approval from the lender when buying a home. This will make you a more serious buyer of sellers and give you a better idea of which home you can afford. Get started by getting quotes and comparing rates from at least 3 lenders.
- Be willing to compromise
Just because housing prices are on the rise, that doesn’t mean your budget can do it either. One in five new home buyers have had to remove some item from their listing in order to pay for a property. However, according to the survey, from preparing to forego a garage as a necessity to remove the need for a permanent basement, buying a home may require y