Financial Advice: How Much Cash Is Needed to Buy a House?

In addition to the actual cost of a home, people buying houses need cash to pay for closing costs, taxes and insurance. Many people take out mortgages to cover the majority of the cost of a home, but lenders require borrowers to make down payments in addition to the closing costs.

Down Payment

When people finance homes, down payments are typically the largest single cash expense that they incur. Conventional mortgages require people to make down payments equal to 20 percent of the purchase price. The Federal Housing Administration backs loans if borrowers make down payments equal to at least 3 1/2 percent of the purchase. Someone buying a $200,000 home must produce between $7,000 and $40,000 for the down payment. Some lenders have limited mortgage programs that allow people to make no down payments, but these loans generally have high interest rates.

Escrow

Many lenders require home buyers to escrow their homeowners insurance and property taxes. Normally, monthly payments include tax and insurance premiums and over the course of a year, sufficient funds are deposited in the lender administered account to cover both expenses. Taxes are paid annually so unless you buy a home on the day property taxes are due, you must make an initial escrow to cover the portion of the year's taxes that already accrued before you bought the home. Many lenders require borrowers to make an initial deposit equal to two months escrow payments when they close on the loan. Taxes and insurance premiums vary by state but these initial deposits can amount to thousands of dollars.

Mortgage Premium Insurance

Anyone who buys a home with an FHA-backed loan enjoys the benefit of having a small down payment requirement. The FHA provides insurance for lenders in the event that borrowers default on FHA-backed loans. To fund the insurance, the FHA charges the borrower for mortgage premium insurance. As of 2010, the FHA charges an annual premium of 0.9 percent of the loan amount with a 1 percent upfront premium. That equates to a $2,000 premium due at closing on the purchase of a $200,000 home.

Other Costs

Many lenders charge origination fees or funding fees when writing loans. These fees typically amount to about 1 percent of the loan amount. In 2010, a study in all 50 states by Bankrate.com found that on average, lenders in the state of New York charged the most for closing fees which included origination, appraisals, flood determination and other applicable fees. On a $200,000 home purchase, the fees amounted to $3,741 in New York. Fees were lower but comparable in other states.

References

• Freddie Mac: Ratio Requirements for Conforming Mortgages
• MSN Money Central: Don't Bite Off Too Much House
• Lending Tree: How Much of a Down Payment Do You Need?
• Bankrate: New York has Highest Closing Costs
• U.S. Department of Housing and Urban Development: Common Questions For First Time Homebuyers
• FHA Changing its Mortgage Insurance Fee Structure

Resources

• CNN Money: Top Things To Know