When it comes to buying a house, it comes with different factors that one needs to take into consideration. This entire process can be a daunting one especially if it is your first time buying a house.

With the rise of inflation and the price of buying property in 2023, this entire process can be frustrating.

If you’re in the United States, I’m sure you will agree with me that there is a surge in mortgage rates, and this surge in price can affect your budget. However, no matter how high it might be, buying a home of your own is one of the best financial decisions you can ever make for yourself and your family. This will help you lay down a strong financial foundation for your future.

If you’re wondering what the cost of buying a house is, then this guide is for you. By reading this guide to the end, you’ll be able to make an informed financial decision.

Keep reading to learn more.

What Is the Cost Of Buying a Home (Case Study: United States)

The cost of buying a home is determined by different factors such as location and property value. When you’re aware of this you’ll be able to work and determine how much you’ll be spending in buying a house of your own.

With that all said, let us take a look at the cost breakdown of buying a home.

Buying a Home (Cost Break Down For Buying a Home)

While the price tag of a property plays a vital role in property acquisition, it is also vital that you take your time to calculate some of the major expenses you’ll need to cover to buy your first home or an additional home to your portfolio.

Initial Deposit/Downpayment

An initial deposit is usually the amount of money that is needed of you to pay upfront to show your commitment to buying the house. Having to pay a higher downpayment will help in lowering the amount of money you need to borrow. With this, you’re guaranteed lower monthly payments throughout your loan.

A lot of lenders out there prefer to work with individuals who show commitment to making higher down payments because it helps them reduce the risk of default loans and on the other hand, it helps you reduce your monthly payments.

Now that we have talked about a downpayment, let us take a look at how much you need to put down for a house in 2023.

Best Amount To Put Down For a Home

Many people out there will tell you that the best amount you need to put down for a house is 20 percent of the outright price of the property. Let’s say, for example, you want to buy a home worth $500k, a 20 percent downpayment of that property will be around $100k right? However, according to Bankrate, a stat they got from realtors.com shows that in the United States of America, the average downpayment on a primary residence is around 13 percent.

With so many lenders out there that offer low no-downpayment mortgages allow their borrowers to access their mortgage even with lower upfront payments. When you take a look at some conventional mortgages like those backed up by Fannie Mae and Freddie Mac require their borrowers to make just a 3 percent downpayment. One downside with most of these mortgages is the requirements and income restrictions that come with them. Some of them require a credit score of 580 and above before one can qualify for such a mortgage. A good example of this is the FHA loan which requires borrowers to make a downpayment of 3.5 percent.

If you’re aware of the VA loans and the USDA loans, you’ll learn that these loans require no downpayment, although you need to meet some of those strict criteria they put in place.

With all of this said, when you look deep, you’ll get to understand that a downpayment is very important and that is why you need to figure it out so you can have a financial awareness of how your budget should look like. I always advise my readers never to spend every penny to cover a downpayment for a home they want to buy. When you do so, you’ll find yourself being stretched to the limit because you might need to cover some other important expenses.

To make sure that this is put in check, most lenders will take their time to evaluate your entire financial portfolio and why doing so, they expect you to have some reserved cash that you can use to make repayment of your loan if you find yourself in some unexpected financial predicaments. These are some of the things life might present to you and they are very much aware of it. This is more like your plan B and a backup plan for emergencies that may also arise such as medical bills, loss of job, or other worst scenarios one may think of.

So the question now is, how do you build your downpayment fund?

Keep reading…

 How Do You Build Your Downpayment Fund?

Closing Cost

When it comes to buying properties such as a house, the closing cost is another form of expense you may need to consider. In many cases, you’re expected to make a payment ranging from 2%-5% of your mortgage loan principal in closing costs.

According to Bankrate.com, a statistic they presented which they got from ClosingCorp, shows that as of 2021, borrowers paid an average of $6,905 in closing costs and taxes on a single-family home. When you look at this you’ll realize that closing cost varies based on the location or state where you’re buying your home. Let me give you an example, when you take a look at Washington D.C, the closing costs are nearly $30,000 while in Missouri, it is just around $2,061.

So the question now is, what are those things being included in a closing cost?

What Are The Things Included In a Closing Cost?

As mentioned above, the closing cost has to do with some of the fees that are being charged by a lender and other companies that are into the approval of loans and finalization of home sales. Below are some of the fees that are included in a closing cost:

• Appraisal
• Credit report
• Origination
• Application
• Title Search
• Title insurance
• Underwriting

All of these costs mentioned above usually vary depending on the lender. This is why you need to pay close attention to the origination fees and underwriting fees so you can better understand where you can save some costs. In many scenarios, you’re likely going to pay some other form of additional fees and expenses on closing day which are not considered closing costs. These fees are called prepaid, and they include things like homeowner insurance premiums and property taxes. Aside from those, you might be expected to repay interest on any days remaining through the end of the month.

Are These Closing Costs Avoidable?

Most people will ask if they can avoid closing costs. The truth is, that the closing costs are unavoidable. However, you can pay them gradually instead of paying all at once. One other thing you may be able to do is to negotiate some of the closing costs, especially in the buyer’s market.

If you believe that the closing cost may be a little bit difficult for you to pay, most of these lenders have the option for no-closing-cost options. With this option, the lender will be able to roll the expenses into an overall loan. Just have it at the back of your mind that doing so will cost you more in the long since you are expected to pay the interest on the additional amount.

Aside from all of the things discussed above, you need to understand that there will be additional costs involved such as the moving expenses, furniture, storage, and other cost as you move into your new property. Just see that as miscellaneous expenses that are needed.

Prepaid Cost For Your Home

The closing cost must be considered, aside from the prepaid cost being something you need to consider as well which you must pay as well. This prepaid cost is usually an upfront cash payment that you are expected to pay at the closing for certain mortgage expenses before they’re due. Some of this includes things like homeowner insurance, property taxes, and mortgage interest. Most of the lenders out there will usually hold your funds for these monthly recurring expenses as a form of escrow until your bills are due.

Under the prepaid cost, there are two major things you need you need to look at which are the Earnest Money and Cash Reserves.

Earnest Money

This earnest money is usually paid by prospective buyers as a means to show their seriousness or intent for the purchase of the home.

To show that you want to get the home, you can pay one percent of the price agreed for the home purchase. I want you to understand that the earnest money is not an additional expense. This is just like paying a portion of the expenses, which is the purchase of the home. After your offer is accepted, in one or two days, you pay the earnest money. At the closing of the deal, the money is then credited towards your payment.

Cash Reserves

The cash reserve is proof that is usually requested by most lenders to know if you have extra savings on the ground to cover your mortgage payment if there is an urgent emergency on the ground or a change in your income as a result of unforeseen circumstances. These reserves are usually measured in months. Let me give you an example that will better explain what I mean by that.

Let’s say for example you have a total of $7,200 in your savings after the overall closing cost on your home, and your monthly home loan payment is $1,200, you have six months of reserves. Non-liquid assets, like funds that can only be withdrawn upon retirement, typically don’t qualify as reserves.

The next thing you need to look at is the moving cost.

The Moving Cost

The cost of moving into your new home is something you need to consider. This is a budget you need to put aside because you need to spend before you can move your properties. This cost is usually determined by the size of your home, the location where you are moving from, the weight of the property, and many more.

In the United States, data and statistics presented by Home Advisor show that the typical cost of moving your properties when moving into a new home usually varies between $915 and $2,528, with the average usually within $1,711.

So you see, this is an additional cost that will be leaving your bank. Aside from that there are other things you need to factor and put into consideration. These are things like boxes, packing tape, and bubble wrap. As little as they may seem, make sure you factor them into your potential cost of moving from one place to another.

Paying For Your Home

House payment is the main important on the list of things to consider if buying a home. As much as you are puzzled about how much to buy a house, you must know how much it will cost you every month, not just the closing cost.

One important thing I want you to know is that your monthly mortgage payment is one of the most predictable on the list when talking about the cost of buying a home. you need to get your math right or you can use special software from websites like Investopedia or Bankrate to have an idea of how much you’ll be paying every month. Let me give you an example that better explains what I’m saying here. Let’s say, for example, if you borrow $240,000 and finance it with a 30-year, fixed-rate mortgage at 6.0 percent, you’d pay $1,438 in monthly principal and interest.

When you find yourself at this stage, it will be wise of you to try and compare different mortgage lenders to see which one is good enough for you. If you don’t do that, you likely spend so much without even knowing.

Getting An Insurance

Aside from the payment of the principal and interest, you may likely pay for mortgage insurance especially when you pay less than 20 percent as a downpayment. This insurance is very important because it serves as a protection for the lender just in case you can’t pay the loan back.

Most of the loans that make it mandatory for mortgage insurance are the FHA loans. This usually includes additional premiums that come with the mortgage payment. On the other hand, having a conventional loan may require you to pay a 20 percent downpayment. You’ll need private mortgage insurance (PMI) until you have built up 20 percent equity in the home. If you have the intention of canceling the PMI, know that the cost of the PMI usually varies depending on your credit and the loan offer. This is a question that you need to ask your lender for the lender to give you an estimation of how much it will add to your payment.

Ongoing Ownership Cost

Accounting for your ongoing homeownership cost is very important. This is different from the usual monthly payment. As a homeowner, you are required to budget for emergency home repairs and maintenance which is usually 1% or more of the value of your home every year. Let’s say for example, on a $300,000 home, your budget for maintenance-related items would be $3,000 annually.

Be sure to also factor in homeowners insurance, property taxes, HOA fees (if your property is part of an association), utility bills, and regular maintenance expenses.

Things To Know When Preparing To Buy a Home

Preparing to buy a home is the last and one of the most important steps of all when it comes to buying a home.

To go ahead with buying a home, here are some of the steps you need to take.

Checking Your Credit Score: If you’re buying a property through a mortgage, your credit score matters a lot. Most of the lenders out there use it as their number one criterion for lending. They need to be sure that they are working with someone who is capable of paying them back their money and your credit score speaks it all.

Work With a Budget: A budget helps you create a realistic and achievable goal. This is something you need to have at the back of your mind. As a financial expert, when it comes to budgeting for your new home, I’ll advice you to go for the 28/36 percent rule, in which you should spend no more than 28 percent of your gross monthly income on housing and no more than 36 percent total on debt.

Save For Your Downpayment: The downpayment is needed by the lender to know your seriousness. This downpayment is usually 3 percent of the home purchase price. I will advise you to try and save like 20 percent for the house. This will help you avoid paying for mortgage insurance.

Make Your Research On The Best Lender To Work With: Out there, there are so many lenders to work with. When you’re preparing to get home, to all-out shopping and get preapproval from the lender you selected. This lender will provide you with a better idea of how much home you can truly afford. Start by shopping around and getting quotes from at least three lenders.

Learn To Compromise: If you can’t afford the type of home you want you can as well get something great that fits into your budget. A home is a home so long as you start a happy family right there. That is the goal. You can also give up some amenities such as a garage or a basement. In the future, when you’re financially okay, you can as well make some modifications.

Conclusion

Buying a home is important especially when you plan on starting a family. With your own home, you can build amazing memories that will last in the heart of your family. If you find this article helpful, you can also share. This will encourage us to write more amazing articles like this in the future. Thanks for stopping by.