How Much Cash Do You Need On Hand to Buy A Home?

by Michele Lerner


Potential homebuyers tempted by the federal tax credit are moving fast to evaluate their budget and meet with a lender to figure out how much house they can afford. When trying to calculate your budget, it is crucial to know not only how much a lender will loan you, but also to think carefully about how much cash you will need to buy a home.

In addition to needing money for an earnest money deposit, which will be part of your contract, you’ll need funds for the rest of your down payment, closing costs and home purchase expenses such as an appraisal, home inspection and moving. At the closing table you will also need to fund escrow accounts for your homeowners insurance and property taxes, plus any condo fees or homeowner association dues.

To put the amount of cash that you will need on hand to purchase homes in various price points, we look at two examples below.

For this three-bedroom home in Silver Spring on the market for $425,000, a buyer would need almost $28,000 in cash if using FHA financing. A down payment of 3.5 percent is $14,875, and an additional 3 percent for closing costs would come to about $12,750, totaling $27,625. Obviously, if you use conventional financing with a larger down payment of 10 or 20 percent, the cash on hand at closing would be $55,250 and $97,750, respectively. A 30-year fixed rate loan at 5.5 percent on the financed $410,125 with an FHA loan would run about $2,328 a month including principal and interest.

For this two-bedroom, a 1,000 square-foot condo in Columbia Heights on the market for $507,500, a buyer would need about $35,000 in cash if using FHA financing. $17,762 would be needed for the down payment and $15,225 for closing costs, a total of $32,987. A 30-year fixed-rate loan would cost about $2,780 per month at a 5.5 percent interest rate. At the closing, buyers usually pay two months of condo fees, then skip the condo fee payment for the first month of residence.

One last consideration: Most lenders prefer that borrowers have some cash reserves on hand, typically at least three months of mortgage payments.

See other articles related to: home buying, dclofts

This article originally published at http://dc.urbanturf.com/articles/blog/how_much_cash_do_you_need_on_hand_to_buy_a_home/1691


  1. Peanuts said at 1:49 pm on Tuesday January 19, 2010:

    Some developers pay up to $10,000 for closing costs and I think you can use the $8000 tax credit for closing costs.

  1. Shirlington said at 5:13 pm on Tuesday January 19, 2010:

    The tax credit you only get back when you receive your tax return so I don’t know how you would use that for closing costs unless it was after you go the credit.  You can’t just transfer it over to someone at closing.

  1. Sadk said at 12:01 pm on Wednesday January 20, 2010:

    No one should be paying closing costs in this economy. I didn’t! Your realtor should be able to work on your behalf to strike up a deal.

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