Homeownership is one of the best ways to build wealth, but there are costs involved that require savings and planning. While there are some first-time homebuyer programs that may reduce how much of a down payment is needed, most people should plan to put down 20% of the purchase price to avoid paying extra costs such as private mortgage insurance (PMI). For individuals putting down a smaller down payment, lenders likely will require PMI which is an insurance you pay for to protect the lender if you default on the loan.
The cost of PMI varies based on the type of loan and the amount borrowed. For some people PMI may be a good option because it allows them to purchase a home in an expensive housing market with less cash out of pocket, but they will have the monthly PMI cost added to the mortgage bill. The good news is PMI can usually be removed after you reach 20% equity in your home.
Depending on your income level or if you are a military veteran, you may be eligible to buy a home with no down payment and no PMI requirements. The U.S. Department of Veterans Affairs offers information on VA-backed loans and the types of programs available to veterans. Realtors and lenders can often help new buyers identify government programs such as U.S. Department of Agriculture loans or Federal Housing Administration loans that help low-income buyers purchase a home. These programs are based on income and may also have restrictions about the location you can purchase a home.
Assuming you will use a conventional loan and are able to save 20% for the down payment, you also need to save for closing costs which in Colorado average .86% of the purchase price. In some cases, sellers may be willing to help with a portion of the closing costs. A Realtor can help you walk through scenarios and help inform you if the current market makes a seller more or less likely to consider helping with some closing costs. A Realtor also will be able to help estimate the cost of closing which may include items like loan origination fees, home inspections, title insurance, homeowners’ insurance, and property taxes.
After having an offer accepted, there may be repairs required before closing can occur. In some cases, the seller may pay for the repairs or split them with the buyer. There may also be items you would like to change after you own the house, or an appliance may need repairs down the road. According to The Balance, you should budget about 1% for home repairs. The actual cost of repairs may vary based on the age and condition of the home you buy, but you should not assume the monthly mortgage is the complete cost of home ownership. You may also have a homeowners’ association fee associated with the neighborhood, fees for trash or utility services, and costs to mow or water lawns.
Knowing how much to save for your home purchase is only part of the financial picture. There are several factors that could impact the affordability of a home. In addition to your income, your debts and the amount of down payment you saved, your credit rating and the mortgage interest rate may affect the monthly mortgage amount. According to Zillow, most lenders look for a debt to income ratio of 36% or less when determining if a buyer can afford the home.
If you’re going to be in the market to buy a home, start planning early. Talk with Realtors, lenders, or mortgage brokers to see who you want to work with. Building these relationships early can help you to develop a solid financial plan so you can find the best deal for your new home.