To buy a house, you need cash for a down payment...and then some. Here's a look at the actual amount of money you'll need on hand at closing to purchase a new home.

One of the biggest shocks of buying a home is finding out that you need way more cash to close on a house than just a down payment. It’s hard enough to save for the down payment on your home, only to find out that you need more—often a lot more—in order to complete the transaction.

Let’s look at how much cash it takes to actually purchase a home. And where possible, suggest ways that can reduce or even eliminate the additional cash requirements.

The actual down payment

This is the only cash outlay in the home-buying process that’s obvious to most buyers. It is usually expressed as a percentage of the purchase price of the property. For example, if the purchase price is $200,000, and you’re required to make a 10% down payment, you’ll have to pay $20,000.

That’s the easy part.

How much do you need for a down payment on a house?

It varies. With most lenders, if you want avoid paying additional private mortgage insurance (PMI), you’re looking at a 20% down payment. But coming up with 20% may be difficult for many first-time buyers, so mortgage lenders have options with down payments of 10%, 5% or—if you qualify for special FHA loans or VA mortgage loans—as little as 3.5%.

One of the best things you can do is get a feel for the interest rates you can expect to pay on a mortgage. Credible lets you compare rates from three separate lenders in only three minutes. It’s easier to know how much you’ll need to save if you can calculate what your monthly payment will be once you close.

This is another good reason to shop around for the mortgage lenders.

Closing costs

This is where things start to get a little complicated. This is because the cash outlay to make the purchase becomes (often) much higher than the down payment alone.

Closing costs may run up to 2 to 3% of your loan amount

On a $200,000 mortgage, you’ll need to come up with between $4,000 and $6,000 in addition to your down payment.

Closing costs vary from one state to another. This is due to differences in either the real estate transfer tax, or mortgage “stamps” (government taxes collected based on a percentage of your mortgage loan amount). They can also vary based on different rates charged for appraisals, attorneys, and even title insurance.

Closing costs can also vary from one lender to another, and even from one loan to another. For example, each lender charges a different application fee. In addition, lenders often charge “points”—so named because they represent a percentage point of the loan amount.

An origination fee is one kind of point. It represents compensation to the lender for placing the loan. Discount points are another type. They represent points paid to lower the mortgage interest rate on a permanent basis.

There are actually two alternatives that can either reduce or completely eliminate closing costs:

  1. Negotiate for the seller to pay your closing costs. This will only be permissible in areas where this is common practice.
  2. Negotiate premium pricing with your lender. This is where you pay a higher interest rate on your mortgage in exchange for the lender paying the closing costs.

Either may be a good option, particularly if you are making a minimum down payment, like 5% and adding closing costs on top would make your cash outlay significantly higher.

Prepaid expenses

These are probably the most confusing charges for home buyers, but they are completely necessary. With most mortgages, the lender will put real estate taxes and homeowner’s insurance in escrow. This means that those charges will be included in your monthly payment, and paid by the lender when due.

In order for that to happen, the lender needs to collect certain amounts upfront, to ensure that the funds are available to make the payments when they are due. The escrow accounts are set up to pay the charges on the next due date, while a portion of your monthly payment replenishes the escrow account for the due date after that.

Depending on where you live, and the frequency of real estate tax collections, the lender may have to put anywhere between two and 12 months of real estate taxes in escrow. If the taxes on the house are $250 per month, and a six-month escrow is required, that will translate to a prepaid expense of $1,500 at closing.

The same applies to insurance.

For homeowner’s insurance policies, you’re typically required to prepay a one-year homeowners insurance policy on the house, plus an extra two months of premium charges to the lender’s escrow account. The lender may also escrow one or two months of premiums for PMI as well, if required. You can find the best insurance rates by going through Policygenius—they can show you a number of rates and you can easily compare and choose the best on for you.

Depending on where you live, prepaid expenses may come to as much as 2% of the loan amount.

Fortunately, you can have some or all of the prepaid expenses paid for you by either the seller, or by premium pricing paid to the lender. A third option is to decline the escrow arrangement by the lender. This will require that you make a down payment of at least 20%.

Utility adjustments

Utility adjustments can include a large number of charges. Luckily, they seldom come to more than a few hundred dollars. They basically represent utility costs paid by property seller in advance.

For example, if a seller fills the heating oil tank just before the closing, you’ll be required to reimburse the seller for the unused oil. This will happen at the closing table. Similar charges can be incurred if the seller has prepaid other utilities, such as water, sewer, or trash removal.

Still another expense that could require adjustment at closing are homeowners association fees. In many homeowners association neighborhoods, member fees are paid on an annual basis. If the seller has paid the fee for the full year, and you’re closing on the house on March 31—three months into the year—you will be required to reimburse the seller for nine months’ worth of fees. There may also be a fee to the HOA to get started. They may call it a transfer fee or something similar. Basically, it’s a lump sum upfront from the new homeowner to get into the HOA.

Since these adjustments are direct expenses, they generally cannot be paid by the seller, since doing so could constitute an inducement to complete the transaction.

Lender-required “cash reserves”

This one takes many home buyers by surprise. It isn’t a closing expense, but lenders require that you have so much cash left in savings after all closing costs are paid.

Lenders have a cash reserve requirement to avoid a buyer “closing broke”. They don’t won’t you to end up in an early-term default. This requirement ensures that the borrower will be able to make their payment during the first few months.

The most typical cash reserve requirement is two months. That means that you must have sufficient reserves to cover your first two months of mortgage payments. So if your principal, interest, taxes, and insurance (PITI) come to $1,500 per month, the reserve requirement will be $3,000.

These are not funds that must be deposited with the lender. But the lender must be able to verify that you will have the funds available in a liquid source. These include savings account, checking account, or money market fund—after closing on the property. Generally speaking, they frown on using retirement assets for this purpose, since those funds cannot be easily liquidated.

Summary

If you are buying a home for $200,000 and need a 10% down payment, the total amount of cash that you may need to provide or at least show looks something like this:

Down payment10% of $200,000$20,000
Closing costs2.5% of $180,000$4,500
Prepaid expenses2% of $180,000$3,600
Utility adjustmentsEstimated$500
Cash reserves$1,200 mortgage payment x 2$2,400
Total cash required$31,000

As you can see, you could need more than 1.5 times your down payment to successfully close on a house.

That’s why it’s important to include the additional cash requirements in your home buying plans.

Compare quotes from over a dozen insurance carriers

Find the cheapest homeowners insurance rates with Policygenius. Start now!

Read more

Related Tools

About the author

Total Articles: 165
Kevin Mercadante is a freelance personal finance blogger and the owner of his own personal finance blog, OutOfYourRut.com. A recent transplant to New England, he has backgrounds in both accounting and the mortgage industry.

Article comments

We invite readers to respond with questions or comments. Comments may be held for moderation and will be published according to our comment policy. Comments are the opinions of their authors; they do not represent the views or opinions of Money Under 30. Comments have not been reviewed or approved by any advertiser, nor are they reviewed, approved, or endorsed by our partners. It is not our partner’s responsibility to ensure all posts or questions are answered.
22 comments
Aubri Schilf says:

I would not recommend as you will have to pay for mortgage insurance (PMI). FHA loans require you to pay PMI for the duration of the loan, while conventional loans only require PMI until you hit 20% equity. If you want to spend less than 20%, Id recommend a conventional loan for that reason.

Burt Silver says:

It’s really great to read this article and to get a better idea of what to expect when looking at buying a home, like the down payment. It’s great to know that typically you would pay a 10% deposit on a house, and knowing that will prove really useful while my wife and I are looking for a new house. Hopefully, we can find one that meets our desired quality as well as budget.

TB says:

Thanks for the advice in this article! I had talked myself into buying my first home (at age 46) after several career downturns and a lot of student loan debt. But, your article just talked me back out of it. I think I’ll stick to renting!

K P says:

I am going to buy a house in the next six months without having the ability to pay 20 % down payment on it. The reason. The cost of properties I am looking is close to $450-500K here in New Jersey. Nothing really is cheap in this god damn state. 20% down on such a price range is close to $100K, which is a lot of money. I quit my job last year to start a farming enterprise. Next year I am planning to buy a 2 acre property where I could start a farm. A 2 acre property close to work(my husband works full time) is expensive. I have savings equal to 10% down payment (from my previous job) and I have two other properties in my home country (one is paid off in full and the other will be paid off in next two years). Another reason why I dont have 20% down payment as liquid. The reason I am buying a house is it gives me much more stability to start a business on my own property and not on rented land. On rented land, there are (and I am currently experiencing) a lot of constraints in what I can and cannot do.
If I wait for cash savings to be equal to $100K (through one person’s full time job), I will have to wait another 5-6 years before I can buy a house. Let me know what you guys think.

james says:

Would you guys recommend this scenario..lets say you are a first time home buyer and you have 75k saved. Instead of putting down the 20% on a 250k house, get an FHA loan and only put down 3.5%-5% then use all that extra cash to renovate your house and get Equity?

Drew Scales says:

the fact that you are a first time buyer and have 75,000 saved leads me to no other answer than you pushing a lot of drugs.

Rob says:

you’re not wrong

Saira says:

I have been saving $$ for 6 months & have roughly half that amount. As an engineer, who has been living in a crap 2-room apartment (everything is in storage) and living off rice and beans, I can see saving that amount. I hopefully will be at the OP’s amount by next yr – and that is also budgeting buying outright a new car.

Hi Rob – That’s high recommended since it will prevent you from being house poor, but it isn’t a mortgage lender requirement, and that’s why it wasn’t included.

You forgot a 6 month to 2 year emergency fund. This is for when someone loses their job, has a medical emergency, or some other unforeseen event. Owners should also budget for new furniture and renovations.

OilBarron says:

I can give you an example from my first buying experience. I bought a townhouse in Houston, TX for about $360k. I put 20% down, so right there was $72k. Add about $9,000 for closing costs, title insurance, lawyers, inspection, etc. so now we are at $81k. I had to put down around $800 for utilities and $2300 into escrow for the fist month mortgage payment (including taxes & insurance). So all in, I was on the hook for $84,100. As Keving pointed out, you need more than that; you don’t want to be cash poor. There were still the movers ($900), my other bills, and being a first time buyer, I was in disparate need of furniture.

All in all, I put away $100k and that was just barely enough to do everything comfortably. At the end of that month I was down to $10k left in the checking account, so there is an example of how a $72k down payment is really more like $90k when all is said and done.

My advice to first time buyers is to plan ahead. As Kevin mentioned, I did not make the decision to buy a house 3 months before my closing date. I saved for 3 years knowing that I would someday want a house. I knew the area I wanted to live in and researched how much I would really need. When it comes to this much money, you really want to make sure you do it right.

That’s an excellent illustration of what it costs to do a home purchase right. You may have had to delay your purchase, but you have more financial strength, and options, as a result.

Hi Justin – You’re talking about a 0 down loan/100% financing – that takes the discussion in a different direction. Those might be easy on the bank account up front, but they invite a host of potential problems later. They are the main reason so many people were “underwater” after the housing meltdown a few years back. I can’t advocate those, and didn’t when I was in the mortgage business. Zero down means zero margin for error. Though I do agree that there are ways to make the closing costs go away, as noted in the original post. Thanks for weighing in.

Justin P says:

NFCU Homebuyer’s Choice Plus – no down payment.

I’ve bought two homes this way so far, and on the most recent one, closing costs (after $5K in sellers’ assistance) ended up being about $200. Yes, that’s two HUNDRED. On a ~$160,000 home.

Just sayin’….there are a lot of variables.

Justin, everything that’s “better” about the no down payment is offset in a higher interest rate, higher monthly payments, and PMI or the equivalent. You saved upfront, but will pay more every month and overall. Nothing wrong with that, if that’s what you want.

Hi Mark – Given how much money we’re talking about, to say that a first time homebuyer should make a 20% down payment may be impractical. But at the same time, it would be highly desirable. By making the larger down payment, not only do you eliminate a lot of other upfront costs, but you also make your loan application stronger. And of course, the higher equity position will make your homeownership more secure.

I would say that if you’re in a position to make a 20% down payment, it would be well worth the delay in the purchase. But that of course would probably eliminate the majority o first time homebuyers, particularly since saving money is so difficult given the high structural cost of living (taxes, utilities, debt, education, health costs, etc).

Kevin,

I do think 20% down for a house is reasonable for all homeowners, including first time buyers. If you don’t have 20% + additional for closing and a buffer, you should save more and wait a few more years or lower your expectations. If you can’t come up with 20% down on a ~200-250k house (Northeast, Midwest = 100-150k house) by age 30, maybe your priorities weren’t buying a house all along?

This isn’t the type of expense where someone should be able to afford it within months of deciding it’s time to no longer rent.

If you’re under 30 and want to own a house without the money to do so, why? Rent protects you from property damage, property taxes, sometimes utilities, and less insurance costs. Increasing those expenses to be house poor and financially illiquid makes less sense than renting and getting by.

Just my perspective.

I actually agree with you on the 20% down Mark. It’s a tough sell though in a country where most people think of homeownerhip as a right and a down payment as an obstacle. My thinking is that if you can’t save up a large down payment, you shouldn’t be thinking of buying a house. After all, if you can’t afford to save for the down payment, what will you do when the house needs a new roof or the furnace has to be replaced?

JM says:

I disagree that most ppl think homeownership is a right. We are bombarded with propaganda that you MUST own a home, and that RENTING is for suckers. I am not saying there aren’t ppl who like to “keep up with the Joneses,” but ppl thinking homeownership is a right, is a stretch in my opinion.

JM says:

Where are you gonna buy a house for 250k in the Northeast?

Mark @ HigherAverage says:

I like the fact that you’re providing a scenario with all of the additional costs associated with purchasing a home. Curious though, regarding your example and the wording through some of your points made, are you in favor of most first home purchases being made with less than 20% down? Financially, it obviously makes more sense with 20% down (no PMI and lower monthly costs), but it also can be seen as 5% down now, lock in a low (historically speaking) rate, get up to 20% equity ASAP and remove PMI, and save that way? I’m excluding 3.5% FHA loans because PMI is now required through the life of the loan, to my knowledge.

Curious what your or any of the other readers’ thoughts are.

Rob says:

After 5 years of paying on an FHA loan and your loan is at 78% of value then lender by law CAN drop PMI.