How Much Money Do You Need To Buy A House?

In today’s current inflationary environment, are you wondering how much money you need to buy a house? In this video, I'm going to explain how much money you really need to buy a house in the current real estate market. We'll crunch the numbers and hear about a real-life example of one of my clients so you know exactly what you'll need to get into the home of your dreams.

Navigating The Market

One of the biggest questions I get from my clients is how much money they need to buy a house. The world’s falling, wars are happening, home prices are at all-time highs, and rates are the highest they’ve been since 2010. One of the reasons that this question is coming up right now is because when there’s more uncertainty, people get nervous that their money might not be worth enough in the future.

This is especially since we're coming out of the pandemic. How should they best allocate funds to buy a home? What’s going to leave their account on closing day? We're going to answer these questions today, so get your notepad and paper ready.

The Honest Truth

When it comes to how much you're going to need to buy a house, the honest answer is probably more than you anticipate. Despite these flashy things like you buying a house with no money down or no closing costs, that's all just crap. The fact of the matter is there are so many buyers out there and so little inventory - at least in the Colorado marketplace.

Back home in Chicago, I see my ideal homes flying off the shelves in a matter of days - if not hours - if they’re priced right. And guess who’s your competition? Big corporations and big investors, people that probably have more cash than the average person. This is why you'll probably need more money than you'd expect to buy a house.

Andrew And Kelly's Story

Our good friends Andrew and Kelly just bought a property here in Colorado at a purchase price of $600,000. The nice thing was they had enough money saved up - about $275,000 - from the last couple of years. They really did well in the stock market, sold a couple of properties, and are getting ready to invest in a small business. They have no debt, but they’re really good with their money.

They each have an 800 credit score and both collectively made about $125,000 last year, which is also nice. And again, they have that big nest egg of liquid cash. We'll use this example to show you how to figure out how much you can afford.

The Loan To Value

The first number that you’re going to want to write down on your scratch paper is your loan to value. We have a calculator that helps you do that for free, which you can download whenever you’d like. The first unit of measure on a $600,000 purchase price is this loan to value amount, a simple ratio that's a main part of the approval equation. This is simply how much you're going to borrow or leverage versus the cost of the home.

We walked our clients through what we call a total cost analysis, which is an analytical spreadsheet and tool that I use during our formulation of what loan product is best for our client. It came down to two simple numbers: our clients were either going to put 10% down or 20% down. In the 10% down example, the downpayment is $60,000. In this example, putting 20% down will double the downpayment to $120,000. If you recall, Andrew and Kelly had a little over $275,000 in liquid cash, so it wouldn't be depleted even with 20%.

Here’s a pro tip: just because you’re buying a house doesn’t mean you want to liquidate all your funds. If something goes awry financially - like somebody loses a job or the stock market crashes - you'll benefit from having a couple of $100,000s sitting in cash.

Closing Costs

In the first example, 10% down was $60,000 grand. Closing costs for either 10% or 20% down are about $10,000. This is spread across the title report, the bank’s underwriting fee, transfer taxes (which are state taxes here in Colorado), insurance, and escrows. Andrew and Kelly's closing costs were about $8,000 total.

Here's another pro tip: the bank only has one fee, and that’s their underwriting fee. This means the bank had only $1,000 of that $8,000, which was technically a bank fee when they acquired this property.

How Much You Need For A House

So how much money do you need to buy a house? Probably more than you need. It's going to be a combination of the outflow for your downpayment - which is the ratio for your loan to value number - and your closing costs. You always want to earmark $7,000 to $10,000 for your overall acquisition costs, just to be safe. Again, these are a combination of factors like title work, escrows, insurance, and taxes.

Of course, if you buy in Chicago, LA, or New York, your closing costs can be inflated from there. If you have any questions, feel free to reach out to me and I'll be happy to help. Don't forget to subscribe to my channel for more videos, and stay tuned to see what I feature next!