How much money you need to purchase a home

The old adage you need 20% down to buy a home these days couldn’t be further from the truth. Contrary to popular belief, you only need a very small down payment to be successful in purchasing a home. 20% down is the old school mantra of lending however if you can put down 20% your payments would be lower however it’s not specifically needed if you’re financial house is in order. Here is what to know…

Keeping things simple 20% down is typically required to avoid having the monthly mortgage insurance. It also gives you the biggest bang for your buck. Putting more money down improves your borrowing power and lowers your payments at the same time so it’s the best type of situation to be in if possible.

The minimum down payment you need is 3.5% for an FHA loan or 5% down for a conventional loan. Both programs for the most part mirror each other in terms of payments. So for illustrative purposes, we’re going to be talking about the 3.5% down FHA loan which would require mortgage insurance. That’s the minimum down payment you would need to be successful on a house. So if you are in the real estate market where the average priced house is 550k plus you need at least $20k to work with. A good rule of thumb is that you would need anywhere between 15 to 20k to purchases a single-family house in most markets versus say around 10k to purchase a condo in most markets, your area and geographical location might vary, but this is about the broad example.

So going back to our illustration at $550k with 3.5% down, you will also have closing costs which could be on average about 2% of the purchase price in most situations. In some markets which are particularly competitive getting a seller credit for closing costs might be extraordinarily difficult. Keep this in mind you will likely need the down payment plus all or half of the total closing costs in cash.

This is something you’ll have to take into consideration at the advice of your real estate agent. You may be in a market where you end up making a bunch of offers and you get a bid out, and your real estate agent tells you really need money for closing costs, take their advice, they know what they are doing they know the local market.

Just because you might be to qualify for a minimum down payment doesn’t necessarily mean that you’ll get your foot in the door because needing asking seller credit for closing costs could be the needle mover that takes you from where you are present to where you’re going. It might mean having to swallow your pride and ask mom and dad for a down payment and closing costs. Your employer which also is an eligible source is sufficient as is tapping 401k.

The 2021 real estate climate right now is very competitive. There’s a big demand for housing and broadly speaking very limited supply so to put your best foot forward. You really need to be prepared by having both your down payment and closing costs set up to be successful in purchasing the home.

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