Buying a home is one of the most exciting financial moves possible for you and your family. However, since it’s also one of the largest purchases you’ll make in your lifetime, it requires quite a bit of preparation.
We don’t just mean deciding where and when to move, figuring out how many bedrooms your family needs, or picking a neighborhood based on your commute to work, though. The most crucial aspect of preparing to buy a home involves only your budget.
Today, let’s talk about the things you’ll need to save for if buying a home is in your future, and how much you should realistically tuck away.
You may be putting money in savings for retirement, a rainy-day fund, or even to buy a new car. But planning to buy a home takes real dedication, simply due to the sheer magnitude of the numbers involved.
You’ll need significant savings before you ever begin house-hunting, which means starting as early as possible. And, as with any financial goal, the more aggressively you approach your savings efforts, the sooner you’ll reach your target.
Determine your timeline for buying, then calculate how much money you’ll need to set aside. Divide that out and begin putting cash in a dedicated savings account each payday.
Just how much will you need in order to buy a home? Well, that depends on exactly what, where, and how you plan to buy. However, here are the primary cash expenses you should consider when saving.
The biggest chunk of savings will go toward your home’s down payment. The traditional down payment is 20% of the home’s cost, with the remainder financed by your mortgage. This means if you buy a $200,000 home, you’d need $40,000 saved for the down payment.
Some lenders accept less. While zero-down mortgages are harder to find these days, borrowers with good credit can often snag 3.5% to 15% down.
If you put less than 20% down, you’ll likely need to pay for private mortgage insurance (PMI).
When your initial purchase offer is accepted, you’ll be expected to put up earnest money as a good faith gesture. Earnest money requirements can be as low as $500 to $1,000 or as high as 1% to 3% of the home’s cost. It really depends on your local market at the time.
Earnest money is held in escrow until the sale is complete, then applied to your final cost.
Inspections and Appraisals
Buyers are typically responsible for covering a home’s required inspections and appraisals. These can often be paid at closing, but payment is sometimes required upfront by the inspector.
Depending on your area and your home’s size, these inspections can equate to hundreds, if not thousands, of dollars.
Closing Costs and Insurance
The day you finalize your home purchase, you’ll be expected to pay for a number of expenses. These are called closing costs, and they cover things like title searches, attorney fees, homeowner’s insurance, and appraisals.
Closing costs are usually about 1% to 2% of the home’s cost.
Before buying, you should make sure you’ve saved enough to cover future maintenance expenses… because they will pop up. Plan to spend about 1% of your home’s value each year, for both regular maintenance and unexpected repairs.
When saving and even house-hunting, you’ll want to have a price range in mind that you can actually afford. Be sure to account for all the expenses involved with a new home, beyond just the mortgage. This includes things like PMI, homeowner’s insurance, property taxes, changing utility bills, and maintenance expenses.
Budgeting for your new home requires many considerations. Once the numbers are crunched, you might be surprised by what you can afford or where you’ll need to cut back.
Once you’re ready to buy a home, contact your Wintrust Mortgage loan originator to start the homebuying process!