If you are starting to get sick of renting, now is a great time to start laying the groundwork for home ownership. But you are probably wondering just how much you need to save…
This blog will share exactly how much you should have in your account to buy a home in the Twin Cities area.
Purchasing a home is likely one of the biggest financial investments that you will make in your life. So you want to be sure to have enough money set aside to avoid being house poor and honestly it will make you so much less stressed during the house hunt.
The Down Payment
The biggest chunk of money that you will need to save up for (and also the most well known) is your Down Payment. You will often hear people tell you not to purchase until you have saved up 20%. And don’t get me wrong, there are pros to putting a hefty chunk of money down such as 1) lower monthly payment and 2) avoiding private mortgage insurance, but there are also cons. Like waiting to save that amount and then being completely priced out of a market.
In general, the lowest amount that you can put down on a home is 3%. (However, if you are a veteran, you can buy a house with 0% down – send me and email if you would like more information about how to use that program.) For the sake of this blog though I am just going to focus on the numbers for a standard conventional 30 year loan.
Here is the Twin Cities Region, the median sales price for homes in November 2022 was $354,000, so we will use that as our baseline.
Now don’t freak out because you think “man I’m not even close to saving that much up.” Real estate transactions are based on percentages, which means that total amount slides depending on the price of the home.
Depending on the neighborhood, that $354,000 house will be more aligned with a 3-4 bedroom family home rather than a starter home. And I am here to tell you that it is OK to not have the picture perfect, HGTV, Instagramable home right off the bat. The average length of time that people own a home is 7 years. So you can begin with a starter and then move up when you build equity in the home.
The other major chunk of money that you need to take into consideration is closing costs. These will range at 2-3% of the price of the home and include the lender fees, title work, pro-rated taxes, and a bunch of other stuff.
Again don’t freak out that is a percentage, so a less expensive house, means less money in.
When you wrap up the down payment and the closing costs, the final total is called Cash to Close. That is the amount that will be on a big fat cashiers check when you make it to signing day.
You also need to be considering the fees that come with buying like inspection costs. A general inspection will take place typically within one week after your offer has been accepted and will cost between $300-$500 depending on the square footage of the house.
There are other inspections that you can add on like a sewer line or radon inspection but those come with additional fees. Check out my video “Types of Home Inspections” for a deeper dive into inspections and what you should expect them to cost. Remember that inspections are NON REFUNDABLE so if you walk away and select a new home, you will pay this fee again.
The appraisal cost is typically between $600-$700, and is charged by the lender for a professional evaluation of the price of the house. Think of it this way, a bank doesn’t want to grant you a $500,000 loan on a house that isn’t valued at more than $200,000. Some lenders will wrap this cost up into their closing costs and others will charge before hand, so be sure to ask your lender how they have you pay for this piece.
Home Maintenance Fund
The final piece that you should save up is for an annual home maintenance fund. This fund isn’t actually paid out unless something happens, and as a home owner myself, I can tell you that something is bound to break within the first year of you living in the home. It is just how the universe balances itself out.
I recommend setting aside 2% of the home price annually to cover emergency repairs, maintenance plans and home supplies. Like a snow blower.
BUT... what about FREE money?
But I have good news – this amount dramatically reduces when you take advantage of free money. And don’t get my wrong, nothing is truly free, but I am using free in the terms of money you don’t need in your account right now.
- One way to reduce the amount you bring to the table is by asking for seller paid closing costs. In the state of Minnesota, you are allowed to ask for up to 3% of the purchase price back in seller paids.
- Minnesota also has programs out the wazoo to help first time buyers with downpayment assistance. The most well known program is up to $10,000 of assistance that comes as a second mortgage on the house at 0% interest for 30 years. You pay it back at the end of the 30 years or if you refinance or if you sell the house. Other counties have additional programs with assistance available and some even have forgivable amounts.
- Down Payment – minimum 3%
- Closing costs – 2-3%
- Inspections – $500- $700
- Appraisal – $600 – $700
- Home Maintenance Fund – 2%
I hope this gives you a better idea on what to expect when saving for a home and shows you that ownership is much more attainable than imagining a 20% down payment situation.