Well, honestly….depending on which lender, realtor, and seller you hook up with, you could end up needing zero dollars. 😱 However, I’m not gonna lie, that can be a difficult task to accomplish. Even so, any savvy lender and realtor combo could get you through this process with as little as 1-2% of the purchase price out of pocket. Is that tricky in a seller’s market? Yes. But it’s certainly not impossible. If you have cash, though, and you want your home buying process to go as smoothly as possible, a safe bet is to have about 8% of the purchase price ready to hand over. The more cash you have available for this process, the easier your life will be.
You’ll need 3% of the purchase price for a conventional loan, 3.5% for an FHA loan, and 0% if you are a member of the military. Now, servicepeople aren’t the only ones who can qualify for a 0% down payment. One of my lenders, Jason Fellah of Supreme Lending, has what he calls, “The Supreme Dream” which includes a 0% down payment. Lenders who can and will do this are few and far between…so make sure you shop around. There’s also always a trade off for everything. So if you choose 0% down, you’ll more than likely pay quite a bit more over the life of the loan to make up for the huge break the lender gave you. If you get an FHA loan, you can use The Michigan State Housing Development Authority (MSHDA) to give you a loan for your down payment (up to $7500). You’ll have to pay this money back over the life of the loan, but at least you don’t have to come out of pocket to pay for it at the time of purchase.
Okay, that’s 3 of the 8%, so what else am I paying for? Many people forget about closing costs. On top of a down payment, you’ll need money to pay the mortgage fees, title fees, and prepaid taxes and insurance. These fees could range anywhere from 2-5% of the purchase price. Many lenders offer “lender credits” to help bring down these costs for certain borrowers in need. Again, though, not all lenders are created equally. You’ll have to shop around to find a lender willing to bend a little or a lot. Each lender has different programs, perks, and costs associated with their mortgages. Another way to avoid paying closing costs is to ask the seller for concessions. This can be difficult in a seller’s market when you are up against so much competition. However, if you can manage to find a house without several offers over asking, then you can offer over asking and then ask the seller to pay your closing costs. This way, the seller won’t lose out on any money. As long as the appraisal matches or exceeds your offer, you can use this strategy or a combination of seller concessions and lender credits.
Even if you can manage to get your down payment and closing costs covered, you’ll still need some money to pay for the inspection, the appraisal, and the earnest money deposit (EMD). Actually, scratch that, you should have money for that, but like everything else, you might be able to finagle your way around it. The inspection will cost you about $500, but inspections aren’t required. The appraisal will also cost you about $500, but if you are lucky, your lender may cover that for you. You could also put it on a credit card if need be. The earnest money deposit is typically 1% of the purchase price, but this step is also not required (contrary to popular belief). I wouldn’t recommend skipping it, but you can if you need to. These costs are all paid within the first week of making your offer, where the down payment and closing costs are paid when you get to the closing table at the very end.
What about the 20% down payment?
But I’ve always heard I should put at least 20% down. So shouldn’t I have like 25% saved up instead of just 8? Well, that depends on what you want and how much wiggle room you have in your monthly budget. Putting 20% down will save you the cost of private mortgage insurance every month (which could add $50-$100 to your payment each month, depending on your credit score). So if you don’t want that extra expense, sure, pay 20%. Also, consider the difference in monthly payment when you make a 3% down payment as opposed to 20%. On a 100k house, that’s a difference of $17,000. On a 200k house, that’s a difference of $34,000. That’s a lot of money! Some people would rather keep that 17-34k to use toward improving their home. Other people don’t have that much money, so they have no choice but to have a lower down payment. But just know that on a 100k house, a 3% down payment will make your monthly payment approximately $70 higher than if you were able to put 20% down. Add that $70 to the $70 you will need to pay for PMI, and you are now looking at a cost of $140 a month to avoid putting 20% down.
Everyone’s situation is different, so do what works for you. Use an online mortgage calculator like Bankrate to help you play around with the numbers. (Also keep in mind that you can put any percentage down, it doesn’t have to be either 3% or 20%).
So, if you need help, help is available. However, if you aren’t in an urgent situation that’s requiring you to buy a home immediately, then do yourself a favor and start putting away some money until you reach at least 5-8% of your desired purchase price. Save more money if you can/need/want to.