How Much Money Does It Take To Buy a Home?
How Much do You need to put down? What About Out of pocket costs?
Brent the Broker tackles one of our most frequently asked questions from buyers. How much money do you need to buy a home? What he goes over may surprise you.
More of a reader? Catch the video transcript below!
A question I get all the time is, “Brent, how much cash do I need to come up with in order to buy a home?”
There’s this giant misconception out there that you need 20% down to buy a home - and that’s a massive number when you consider the home prices here in San Diego.
The truth is, you just don’t need that much. Now, there’s two pieces of the puzzle: there’s the down payment, and then there’s the closing costs.
First, let’s talk about down payments. Did you know the average down payment for a first-time homebuyer is 7%? For a repeat buyer, that average is 16% because they’re typically bringing cash from the home they just sold. Across all home buyers, the average down payment is about 12%.
So, if you’re trying to save up 20% for your $600,000 home purchase, that’s $120,000 - a huge number. Now, if you’re going with the first-time buyer percentage of 7%, that’s only $42,000. That’s a huge difference that can get you to meet your goals of homeownership way faster!
The second piece of the puzzle is closing costs. Closing costs include fees to the title company (which guarantees that the person selling you the home is allowed to), the escrow company (who takes the deed from the seller and money from the buyer and exchanges them once everyone does their contractual obligations), and then there’s some lender feeds rolled in there as well.
Depending on how the lender feeds are structured for your unique situation, the closing costs could range anywhere from $5,000 to $15,000 or more. Now, for this theoretical example, let’s say closing costs are $10,000. So, if you’re targeting a $600,000 home and you put 5% down, that’s $30,000 you need for your down payment.
How are these costs paid? Your down payment has to be paid in cash, whether that be money from your bank account, a gift from a relative, or a combination of the two. Your closing costs, however, can be paid in three different ways. You can pay it out of pocket, the lender can give you a credit toward closing costs (which we’ll talk about in another blog post), or you can get a credit from the seller.
How do you get a credit from the seller? Say they’re asking for $600,000 and you say, “Hey, Mr. Seller, I’ll give you six ten and you give me $10,000 in closing cost credit.” They still get their $600,000 you don’t have to come up with $10,000 for the closing costs.
So, in this example, a $600,000 purchase price with a 5% down payment lands you at $30,000. If you get your closing costs credited in other ways, you only have to come up with $30,000 to buy the home. Now, that’s a lot less than the mythical 20% figure that a lot of people think you need!
Let’s talk VA loans for a second. The VA loan is an interesting situation because it allows you to put 0% down and then get your closing costs credited. We had a client who did this - they put 0% down and got a closing cost credit from the seller. They bought a $750,000 house and they only had to pay $500 out of pocket for the inspection!
FHA loans allow you to put down as low as 3.5% and conventional loans typically start at 5%, so there are a bunch of low down payment options that can really lower the barrier to entry for homeownership.
So, if you’re interested in these strategies or want to know which loan program might be the best fit for you, you can connect with us on Instagram or give us a call!
Brent Edwards (aka Brent the Broker) is a residential real estate agent and Realtor in San Diego, CA who helps clients buy and sell homes in San Diego, California and all surrounding areas. Brent is a highly-recommended Realtor in San Diego by family, friends and past clients. Call Brent today at 619-550-8070 if you have any questions about real estate in San Diego or you'd like to buy or sell a home.
