How Much Money You Really Need To Buy A Home, Part One

by David Steinbrugge

First time Gresham homebuyers may be surprised by the amount of money you need to save to close a deal on a home. In addition to the mortgage down payment, Gresham homebuyers need to be prepared to save up for additional costs and fees to be able to complete the transaction of buying a home. So how much money do you actually need to have saved up to buy a home?

The Down Payment

This is the part most potential homebuyers know they’ll need to save for. The down payment is usually expressed as a percentage of the purchase price of the property. For example, if the purchase price is $200,000, and you’re required to make a 10% down payment, you’ll have to pay $20,000. However, how much percentage you actually put down is something Gresham homebuyers will want to consider carefully.

Gresham homebuyers who want to avoid paying additional private mortgage insurance (PMI), need to save for a 20% down payment. However, coming up with 20% may be difficult for many first-time buyers. With this in mind, some mortgage lenders have options with down payments of 10%, 5% or—if you qualify for special FHA loans or VA mortgage loans—as little as 3.5%

Closing Costs

Generally speaking, closing costs may run up to two to three percent of your loan amount. So, on a $200,000 mortgage, you’ll need to come up with between $4,000 and $6,000 in addition to your down payment. Keep in mind that, due to differences in either the real estate transfer tax, or mortgage “stamps” (or, government taxes collected based on a percentage of your mortgage loan amount), closing costs tend to vary from state to state.

Gresham homebuyers will also find that closing costs can vary depending on the lender, or even from one loan to another. Each lender tends to charge different application fees, and lenders often charge “points” — which are representative of a percentage point of the mortgage loan amount.

Alternatives For Reducing Or Eliminating Closing Costs

Gresham homebuyers can potentially lower their closing costs by a significant amount by trying one of the following:

1. Negotiate for the seller to pay your closing costs. This will only be permissible in areas where this is common practice.
2. Negotiate premium pricing with your lender. This is where you pay a higher interest rate on your mortgage in exchange for the lender paying the closing costs.

Either may be a good option, particularly if you are making a minimum down payment, like five percent and adding closing costs on top would make your cash outlay significantly higher.

Prepaid Expenses

This tends to be one of the confusing points for first time homebuyers. Prepaid expenses, however, are a necessary cost. With most mortgages, the lender will put real estate taxes and homeowner’s insurance in escrow. This means that those charges will be included in your monthly payment, and paid by the lender when due. For this to work, your lender will need to collect certain amounts upfront to ensure that funds are available to make the payments when they are due. The escrow accounts are set up to pay the charges on the next due date, while a portion of your monthly payment replenishes the escrow account for the due date after that. How much the lender will have to put in escrow will depend on where you live and the frequency of real estate tax collections. It could be anywhere from 2 to 12 months of real estate taxes that they need to put back. So, for example, if the taxes on the house are $250 per month, and a six-month escrow is required, that will translate to a prepaid expense of $1,500 at closing.

Insurance

Insurance also falls under prepaid expenses. For homeowner’s insurance policies, you’re typically required to prepay a one-year homeowners insurance policy on the house, plus an extra two months of premium charges to the lender’s escrow account. The lender may also escrow one or two months of premiums for PMI as well, if required. Depending on where you live, prepaid expenses may come to as much as two percent of the loan amount. Fortunately, Gresham homebuyers can have some or all of the prepaid expenses paid by either the seller or by premium pricing paid to the lender. Be sure to discuss your options.

Utility Adjustments

Although you may find yourself needing a large number of utility adjustments, this cost seldom comes to more than a few hundred dollars. An example of a utility adjustment cost would be that if a seller fills the heating oil tank just before the closing, you’ll be required to reimburse the seller for the unused oil. This will happen at the closing table. Similar charges can be incurred if the seller has prepaid other utilities, such as water, sewer, or trash removal.

Gresham homebuyers will also want to take inter consideration homeowners association fees. In many homeowners association neighborhoods, member fees are paid on an annual basis. If the seller has paid the fee for the full year, and you’re closing on the house partway through the year, you will be required to reimburse the seller for the months in which you are living in the house. There may also be a fee to the HOA to get started. They may call it a transfer fee or something similar.

Lender-Required Cash Reserves

Lenders will sometimes require Gresham homebuyers to have a certain amount of cash left in your savings after all costs are paid. This is to avoid a buyer “closing broke.” They don’t want you to end up in an early-term default. This requirement ensures that the borrower will be able to make their payment during the first few months. Typically, your lender will require you to have two months’ worth of payment in reserve. So if your principal, interest, taxes, and insurance (PITI) come to $1,500 per month, the reserve requirement will be $3,000. While these funds do not have to be deposited with the lender, the lender must be able to verify that you will have the funds available in a liquid source.

In conclusion, if Gresham homebuyers are looking to buy a $200,000 home, a 10% down payment is $20,000. The closing costs, which are the equivalent of 2.5% of the home’s costs after the down payment, comes to $4,500. Prepaid expenses, at 2% of $180,000, are $3,600. Utility adjustments can be estimated at about $500, and cash reserves at about $2,400. This would total at $31,000.

Before you begin saving a down payment for a house, you first have to know how much you’ll need to save. Plan to sit down with a mortgage lender who will let you know how much of a mortgage you can qualify for. Stonebridge Mortgage Group

Stonebridge Mortgage Group Offers Guidance On All Mortgage Matters

Stonebridge Mortgage Group offers experienced loan officer and mortgage broker services in Gresham. You can rely on Stonebridge Mortgage Group to help guide you through the home buying process. We help get you pre-approved for a mortgage and help with your real estate loans and other mortgage solutions, both residential and commercial. Stonebridge Mortgage Group serves the greater Portland area and is located in Gresham, Oregon. Buying your first home? We can help!

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