How Much Money Do I Need To Buy A Home?
This seems like a straightforward question that should have a straightforward answer right? How much money do I need to buy a home? Well, you get half of that. It’s a straightforward question with a relatively simple answer, but to get to that answer, we have to work through the equations and process first.
In figuring out how much you will need to buy a home, you’ll need to answer a couple of questions first.
- What is my budget?
- What kind of loan can I qualify for?
- Can I re-negotiate terms to reduce or eliminate closing costs?
The first acronym that you will learn here is DTI which is Debt to Income Ratio. You’ve very likely already seen or heard this term. Basically it’s a calculated ratio that shows how much of your income is going out to bills, debts, and other financial obligations. This is important because it will ultimately tell you the price point you can search in when looking for a home. Another factor will be what you actually get approved for by a lender which is usually based on several other factors as well.
If you’re looking to buy a home, you will add up everything you have going out on a monthly basis.
- Vehicle payments and insurances
- Credit card payments
- Current monthly rent or mortgage
Divide that number by your gross income. The number you get is your DTI. According to an article posted by the Consumer Financial Protection Bureau in March of 2017, your DTI should be no more than 43% (Consumer Financial Protection Bureau, 2017). However, in an article posted May 2018, NerdWallet suggested that a DTI of no more than 36% is ideal (Buczynski, 2018). In July 2017 Fannie Mae increased their DTI cap from 45% to 50% for buyers with strong credit scores and incomes.
The point here is that every lender is going to have their own specific standards for what measure of DTI they’re willing to consider when lending to potential homebuyers: You. This plays a role in considering your final budget for a home because your DTI will play a role in how much lenders will be willing to offer you.
Type of Loan
How much money do I need to buy a house? I’ve heard several industry experts tell first time homebuyers that in the end, they need to come up with 20% down. While that’s a nice round number, and we all like nice round numbers, it’s not necessarily correct.
The type of loan you get will dictate how much you must have for a down payment. Obviously, the more you have for a down payment, the better off you’re going to be in this process altogether in the long run, so shooting for 20% down is admirable. But if you qualify for a Federal Housing Administration (FHA) Insured loan, you’ll need to come up with 3.5%. Some lenders even offer a program where you can get a loan for 3% down, after you qualify, and get $750 off final closing costs if you take an approved homebuyers education course.
If you are a veteran, currently active military or qualified spouse of a veteran you may qualify for a VA loan. This is a home loan backed by the U.S. Department of Veterans Affairs with nothing required down, and without the worry of having to deal with extra insurance.
After you figure out which type of loan you qualify for, you’ll be able to ascertain how much you need down. Basically, you need anywhere from 3% to 20%.Though, if you want a static number before you start, the average is 10% to 15% for most homebuyers.
PITI stands for Principle, Interest, Taxes, and Insurance.
When buying a home, there will be closing costs unless you can negotiate favorable terms that reduce or eliminate them. In some housing markets, like Raleigh for example, it’s common practice for the seller of a home to pay all the closing costs. In some markets this is not the common practice, so it’s much harder to convince sellers to pay the closing costs, and in some markets this isn’t even legal for various reasons.
You can also try to negotiate with your lender for them to pay the closing costs. The tradeoff here is that you’ll end up paying a higher interest rate. In the long run you would be trading off the initial cost with paying it out over time.
Otherwise, your closing costs will include things like an application fee for your loan, origination fee, and points that are calculated based on the loan you receive. Generally, for a loan of $200,000 or less, you’re looking at $4,000 to $6,000 in closing costs unless you can renegotiate those terms. In some markets, the absolute minimum for closing costs is $2,000.
The best way to get a hard number for what you need talk is to your lender and realtor. They are most likely very well versed in the local market and can give you a good number to shoot for.
(2017, March 3). Retrieved February 20, 2019, from Consumer Financial Protection Bureau: https://www.consumerfinance.gov/ask-cfpb/what-is-a-debt-to-income-ratio-why-is-the-43-debt-to-income-ratio-important-en-1791/
Buczynski, B. (2018, May 29). Understanding Debt-To-Income Ratio for a Mortgage. Retrieved February 20, 2019, from Nerdwallet: https://www.nerdwallet.com/blog/mortgages/debt-to-income-ratio-matters-youre-buying-home/