How much cash do you need out of pocket to buy a house?
The traditional answer to that has been 20% of the purchase price plus 2-5% closing costs.
Most markets and lenders today are much more flexible.
The three most common types of loans are conventional, FHA and VA loans. Conventional loans are by far the most common type of loans and are often preferred by sellers over FHA and VA loans. Conventional loans are typically preferred because they are easier to close and require less inspections and contingencies than FHA and VA loans.
Conventional loans are loans that are conforming, meaning they meet standards set for credit scores, debt to income ratio and loan to value ration. These loans are backed by Fannie Mae.
In 2016 the minimum limits for conventional loans are:
- 680 Credit Score
- 3% Down Payment
- 28% of your monthly gross income maximum to for housing expenses which includes your mortgage payment, interest, private mortgage insurance (if putting down less than 20%), homeowners insurance, homeowners association and dues CDDs and property taxes.
- 36% of your total monthly gross income maximum to cover all of your monthly debt payments including car loans, student loans, credit cards, child support
These are general rules of thumb. You can qualify for a conventional loan with a credit score as low as 620 with a higher down payment or exceed the total debt to income rules if you have enough in reserves (savings in the bank). It is important to note that while a 3% down payment is possible, 5% is more common and may give more favorable conditions. To discuss your specific situation, it is best to contact a mortgage professional early in your home search.
Conventional loans with less than a 20% down payment require Private Mortgage Insurance (PMI) which costs between .5% and 1% of the loan amount per year and is broken out into your monthly payment. PMI protects the lender in case of default and can be canceled as soon as your loan to value ratio is 80%.
FHA loans can be good options for people with lower credit scores, less money down, or tighter debt to income ratios. They require additional inspections. So they aren’t as preferred by sellers.
The minimum requirements to be approved for FHA loans are:
- 580 credit score
- 3.5% down payment
- 43% total gross monthly debt to income ratio allowance.
Credit scores lower than 580 can be approved with a 10% down payment.
FHA loans require an upfront private mortgage insurance premium on all loans with less than a 20% down payment, which is currently 1.75% of the loan amount. Although this is called an upfront amount, it is actually added to the total amount of the loan. FHA loans also require annual private mortgage insurance, which is paid in 12 monthly installments. Conventional loans only require a monthly PMI premium. The combination of the upfront and annual FHA premiums often add up to more than the buyer would pay with a conventional loan. Check with a mortgage professional to see which option works best for your situation.
VA loans are made by private lenders and backed by the government subject to the service member or veterans eligibility. These loans are attractive to buyers that qualify because they require no down payment and are assumable, even by non-veterans. This means when the house that is financed with a VA loan is sold, the new buyer can apply to assume the mortgage at the old terms. We aren’t seeing that happen right now because interest rates are near historic lows. Once the interest rates go back up assumable loans could be a marketable feature that help the veterans that are buying homes now at low rates sell their home in the future with competitive terms.
Minimum qualification for VA Loans:
- Typically at least a credit score of 620 but this can vary by the lender
- 0% down payment
- Funding fee ranging from 1.25% – 3.3% depending on the amount of the down payment and if it is the first use of the program or subsequent use, this can be amortized into the mortgage
Similar to FHA loans, VA loans require additional inspections. This creates an additional contingency in the contract and can make this financing type less desirable than other financing types.
The financing terms are part of the contract, so if you want to change between conventional, FHA, VA or any other type of loan or change the down payment percentage after going under contract, that has to be agreed by all parties in an addendum and doesn’t have to be accepted.
So how much do you need saved to buy a house?
You can typically buy a starter home with between 3% and 10% out of pocket for the down payment and closing cost combined.
This is just a starting point for how much you need to have saved to be able to put in an offer. We are in a competitive sellers’ market in Tampa. Offers with more money down or more favorable terms often win over buyers with tighter financing in a multiple offer situation.