If you’re wondering how much money you need to buy a house, you’ve come to the right place. Since buying a house is one of the largest purchases you’ll ever make, it’s a good idea to get a lay of the land. Here, we’ll go over different types of mortgages on the market and the costs for each:

Breakdown of Mortgage Types and Costs

How Much Money Do You Need for a Conventional Mortgage?

How Much Money Do You Need for an FHA Loan?

How Much Money Do You Need for a USDA Loan?

How Much Money Do You Need for a VA Loan

 

Breakdown of Mortgage Types and Costs

Before we get into specifics, let’s take a look at the types of mortgages out there and general mortgage costs.

Types of Mortgages

How much money you need to buy a house depends on the type of mortgage you get. There are five main types of mortgages:

Conventional Mortgages

FHA Loans

USDA Loans

VA Loans

 

Conventional Mortgages

Conventional mortgages are the bread and butter of the American mortgage market. Conventional mortgages are offered by private lenders like banks and credit unions.

While not backed by government agencies, most conventional loans still follow guidelines set by government-controlled agencies Fannie Mae and Freddie Mac. Conventional loans that follow these guidelines are called “conforming” loans. If you want to get a conventional loan that falls outside those guidelines, you can get a “non-conforming loan,” which will likely be more expensive to offset the risk to the lender.

Who are conventional mortgages for?

For most people mortgage shopping, they get a conventional mortgage if they qualify and can afford the down payment and closing costs. Otherwise, government-backed mortgages like FHA loans, USDA loans, and VA loans can be considered.

The largest conforming conventional loan you can get as of this writing is $453,100 (was $424,100 in 2017), though certain higher-cost areas (think: Alaska, Hawaii) have higher loan limits. If you want a conventional loan larger than the loan limit in your area, you’ll be looking at getting a nonconforming loan known as a Jumbo loan.

Fixed Rate Mortgages and Adjustable Rate Mortgages

There’s two types of conventional mortgages that you can get: fixed rate mortgages (FRMs) and adjustable rate mortgages (ARMs).

FRMs

Fixed rate mortgages have the same interest rate for the life of the loan. That means your monthly payment will always be the same. While FRMs may come with slightly higher interest rates than ARMs, they offer stability, making managing your money easier.

ARMs

Adjustable rate mortgages have interest rates that change over time. On most ARMs, there’s an initial time period where the interest rate is low and remains fixed. After that time period is up, the interest rate changes every year depending on the market. If you ever hear about a “5/1  ARM,” that means the interest rate is fixed for the first five years, then adjusts every one year.

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FHA Loans

FHA loans are mortgages insured by the Federal Housing Administration, a part of the federal government. Since they’re backed by the government, FHA loans have their own unique set of

rules.

Who are FHA loans for?

FHA loans were created to encourage home ownership in the U.S. They allow lower credit scores and have lower interest rates than conventional loans.  However, your average FHA loan will still be more expensive than your average conventional mortgage in the long-run. If your credit score is below 620, but over 580, an FHA loan is a good alternative to a conventional mortgage.

FHA loans are best for owner occupied borrowers and for those looking at move-in-ready houses.  FHA offers a 203K renovation loan for borrower’s who want to finance the cost with  a fixer-upper.

VA Loans

Like FHA loans, VA loans are backed by the federal government and have their own set of rules. The United States Department of Veteran Affairs guarantees loans for lenders for VA loans. They’re known for their 100% financing options.

Who are VA loans for?

If you haven’t already guessed, VA loans are for most members of the military, veterans, reservists and National Guard members are eligible to apply for a VA loan. Spouses of military members who died while on active duty or as a result of a service-connected disability may also be eligible for a VA loan.

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USDA Loans

The United States Department of Agriculture offers USDA loans through the Rural Housing Development Single Family Housing Programs Division. Like VA loans, you can get a 100% financing USDA loan.

Who are USDA loans for?

USDA loans are only for low-to-moderate income homebuyers wanting to purchase a home in a USDA approved rural area. There are personal and household income restrictions based on the family size that have to be met. Your income has to be 115% or less than your region’s average income and you must have at least two years of dependable employment history. USDA loans are for people with a steady income living in rural areas who can’t afford a conventional mortgage.

Don’t think you’re in an area that qualifies? It’s worth checking since 97% of the country is eligible for USDA loans.

Jumbo Mortgages

Jumbo mortgages are mortgages that are so large that they’re “non-conforming,” which means they don’t follow the rules outlined by government-controlled agencies Fannie Mae and Freddie

Mac. Non-conforming loans are more expensive and more difficult to get approved for since they’re riskier to lenders.

Who are jumbo mortgages for?

If you want a mortgage that is above the conforming loan limits in your county than you’ll need a jumbo mortgage. For most areas, the conforming loan limit is $453,100, but it’ll be higher for more expensive high cost areas like Los Angeles County ($679,650)). Only those with a decent amount of cash and credit scores 680 or above depending on the program will be able to qualify for a jumbo mortgage.

Mortgage Costs

To figure out how much money you need to buy a house, you need to be aware of what costs are involved. When you get a mortgage, the down payment, the closing costs, prepaid, cash reserves, all need to be paid. We’ll go over all of the fees and which can be negotiated.

Down Payment

The down payment on a mortgage is the amount of cash you pay upfront. The more money down, the smaller mortgage you will have to take out.

Saving for a down payment is one of the largest barriers to homeownership. If you’re looking to buy a house, start saving for your down payment now if you haven’t already.

Closing Costs

Closing costs is an umbrella term that encompasses all of the costs it takes to get a mortgage. Closing costs incurred may include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed-recording fees and credit report charges. Prepaid costs are those that recur over time, such as property taxes and homeowners’ insurance There are a lot of them.

Most closing costs are typically paid by the buyer, who will pay around 2 to 5% of the purchase price in closing costs. In general, closing costs can be broken down into four main categories: commissions, loan fees, title charges, and government recording/transfer fees.

Commissions

The listing real estate agent and the buying real estate agent both earn commission for each property that they sell. Typically, the seller pays commission for both agents, which is usually around 6% of the sale price.

Loan Fees

In order to put together a solid mortgage, there’s many steps which will cost you—the buyer—in loan fees:

  • Loan origination fee: This is the administrative cost the lender charges, which is usually 0.5 to 1% of the loan. If you are a low-risk borrower, you may be able to negotiate this fee to zero.
  • Discount points: Discount points are basically prepaid interest on the loan, which can save you money by lowering the interest rate on your loan. While paying these fees is in your favor, you aren’t required to pay them.
  • Application fee: This is the lender’s processing fee, which may be negotiated.
  • Appraisal fee: The lender hires an independent appraiser to determine the value of the property to make sure it’s worth the loan.
  • Credit check fee: The lender looks at your credit report to determine how risky of a borrower you are, which helps determine the loan amount and interest rate you get.
  • Lender’s inspection fee: If the house is new or under construction, the lender may charge an inspection fee.
  • Lender’s attorney fee: If the lender involves an attorney in the loan transaction, there’ll be attorney fees. These fees can be negotiated.
  • Mortgage insurance: It depends on the loan type, but typically, you’ll need two months’ worth of upfront monthly mortgage insurance when closing.  Mortgage insurance protects the lender in case you stop making mortgage payments.
  • Annual assessments and HOA fees: This only applies if your house or condo is part of a community that requires annual assessments or homeowners association fees. Typically, you’d need two months’ worth upon closing.

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Title Fees

When you buy a house, you get the “title,” which means you have official legal ownership of the house.

  • Title search: Before the title is transferred over to you from the previous owner, you want to make sure there’s no skeletons in the closet that might come back to haunt you. The title search makes sure there’s no an unpaid mortgage or tax liens on the property so the lender is in first lien position. That way, you won’t be caught off guard and responsible for them later on.
  • Title insurance fees: This is a policy that protects the owner and the lender by guaranteeing the title to the property is clear.
  • Documentation preparation fee: This fee is for preparing final legal papers and can be negotiated.
  • Notary fees: This is to pay the licensed notary, who verifies the people who signed the documents.

Government Recording and Transfer Fees

  • Recording fees: This fee pays for the sale to get recorded on public record.
  • Transfer taxes: These are taxes imposed when property is transferred, which vary by state.

 

Prepaids

Prepaid items or “prepaids” are items you pay in advance on your mortgage when closing. The lender collects money upfront and puts them in an escrow account to make payments when

they’re due for the first time. An escrow account is held by the lender and is used to pay the taxes and insurance for your house.

Prepaids are different from closing costs because they’re costs you’d be paying anyway, not costs to create the mortgage itself.

The three main prepaids are:

  • Mortgage interest: The interest that accrues between the closing date and the end of the month is a prepaid item.
  • Property taxes: On a purchase transaction you’ll need two month’s worth of property taxes upon closing. The amount of property taxes you’ll have to pay depends on  the tax rate that the county, municipal or other taxing districts
  • Homeowners insurance: All lenders will require you to have homeowners insurance while you have a loan with them. When closing, twelve months of homeowners insurance is common. Homeowners insurance protects your house against unforeseen damage. This can include:
  • Hazard insurance (fire, wind, and natural disaster insurance)
  • Flood insurance (depending on your location)
  • Earthquake insurance (depending on your location)

Required Cash Reserves

When you and your lender agreed on the mortgage contract, they likely required you to have a certain amount of cash reserves. The more cash reserves you have, the less risky you are to lend money to. You’ll need to make sure you have the agreed upon cash reserves for the loan amount and interest rate you received.

Utilities

You’ll need to pay the utilities on the house from the day it legally becomes yours.

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How Much Money Do You Need for a Conventional Mortgage?

Most people are going to be looking at getting a conventional mortgage, whether it’s an FRM or an ARM. For a conventional mortgage, you’ll need:

  • Down Payment: Most conventional mortgages require 5-20% down. There are newer conventional mortgages out there that allow as little as 3% down. A 3% down payment requires at least one borrower to be a first time home buyer OR you may have income restrictions. The minimum credit score is 620.
  • Closing Costs: For conventional mortgages, you’ll likely pay 2-5% of the loan amount in closing costs. The larger the house, the smaller the percentage is likely to be.
  • Prepaids: Because prepaids includes property taxes, the amount of prepaids you’ll have to pay could vary widely.
  • Cash Reserves: While the amount of cash reserves you’re required to have depends on the loan program and occupancy, 2 months’ worth of mortgage payments is common.

 

How Much Money Do You Need for an FHA Loan?

For those who can’t afford a conventional mortgage, you can find great rates on FHA loans. For an FHA loan, you’ll need:

  • Down Payment: For an FHA loan, you put down as little as 3.5% with a credit score of 580 or higher.
  • Closing Costs: Each FHA loan is taken on a case-by-case basis to determine what a reasonable amount of closing costs is for that particular buyer. Unlike conventional mortgages, a third party can pay up to 6% of the sales price or appraised value (whichever is lower) in closing costs, prepaids, discount points, and other costs.

FHA requires all fees and charges to comply with Federal, State and local laws. These are common fees that are charged:

  • Loan origination fee
  • Deposit verification fees (required for FHA)
  • Attorney fees
  • Appraisal fee
  • Any inspection fees
  • Title search
  • Title insurance fees
  • Document preparation fee (by a third party)
  • Property survey
  • Credit report fee
  • Transfer stamps, recording fees, and taxes
  • Other fees may apply if they are common and customary in your area
  • Prepaids: For FHA loans, you’re required to prepay your first month of mortgage insurance and your first year of homeowner’s insurance, among other prepaid items. Your total FHA prepaids could range anywhere from $1,000 to $10,000 depending on your loan, the level of homeowners insurance required, and the property taxes in your area. As stated above, FHA prepaids (and other costs) can be paid up to 6% by a third party.
  • Cash Reserves: For three to four unit properties under an FHA loan, you’ll need to have three month’s mortgage payment in cash reserves.

 

How Much Money Do You Need for a USDA Loan?

For those who qualify, a USDA loan can provide affordable house financing. For a USDA loan, you’ll need:

  • Down Payment: USDA offers 100% financing. You may need to put an earnest money deposit down when you sign your contract to purchase your home.  The earnest money will applied to closing costs or refunded back to you at closing. The amount of earnest money required can vary. $1,000 is common but it can be more and is a point of negotiation with the seller.
  • Closing Costs: 100% of USDA closing costs can be paid by a third party, like the seller.
  • Prepaids: Because prepaids includes property taxes, the amount of prepaids you’ll have to pay could vary widely. Depending on your loan, the amount of homeowners insurance required, and the property taxes in your area, you can expect to pay anywhere from $1,000 to $10,000 in prepaids.
  • Cash Reserves: There are no required cash reserves for USDA loans. Actually, USDA has limits on the amount of cash you have too much money in the bank,. The point of USDA loans is to provide homeowner financing for lower-income buyers.

 

How Much Money Do You Need for a VA Loan?

For veterans and their families, VA loans are affordable and easy to get. For a VA loan, you’ll need:

  • Down Payment: With a VA loan, you can get 100% financing, plain and simple.
  • Closing Costs: The VA limits how much lenders can charge you on closing costs.

There is one closing cost that only applies to VA loans called the VA Funding Fee.

A VA home loan requires an upfront, one-time payment called the VA funding fee. The fee is a percentage based on the loan amount, what branch of the service you are in and if you are using your VA benefit for the first time or if you have previously you’re your benefits to purchase a home with VA financing.   Some veterans are exempt from paying the funding fee based off of a percentage of disability they have been awarded by VA.  The Funding Fee can be paid in cash or financed into your loan amount.

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  • Prepaids: Because prepaids includes property taxes, the amount of prepaids you’ll have to pay could vary widely. Depending on your interest rate, homeowners insurance, and the property taxes in your area, you can expect to pay anywhere from $1,000 to $10,000 in prepaids.
  • Cash Reserves: There’s no cash reserves required for a single family home on a VA loan. However, you’ll need six months of mortgage payments for a three to four unit property. If you own other rental properties and are buying a single unit home, you may be required to show three months of mortgage payments for each rental property.

 

How Much Money Do You Need for a Jumbo Mortgage?

Jumbo loans come with jumbo costs. Since jumbo mortgages are non-conforming, you’ll need:

  • Down Payment: For jumbo mortgages, most lenders require at least 20% down. However, you can get 5% down with excellent credit, debt-to-income ratio, and plentiful cash reserves.
  • Prepaids: Because prepaids includes property taxes, the amount of prepaids you’ll have to pay could vary widely. Depending on your interest rate, the amount of homeowners insurance required, and the property taxes in your area, you can expect to pay anywhere from $1,000 to $15,000 in prepaids.
  • Cash Reserves: For most lenders, you’ll need at least change 6 to 12 months on average  of mortgage payments in cash reserves for a jumbo mortgage.