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How much cash do I need to buy a house?

You’re ready to be a homeowner. Do you know just how much cash you need to buy that home? The total cash needed upfront to close your mortgage is known as “cash to close.” Once you’re in the mortgage process, your lender will give you that number, but before you start the process, it’s good to understand what cash expenses are involved in purchasing a home.

Robert Harris

January 30, 2022

How much cash you need, or your “cash to close” depends on the:

Cost of the home
Type of loan
Down payment amount

Most people just think about the down payment but, buying a home comes also comes with a variety of fees and expenses that impact how much cash you need.

Earnest money: 1-2% purchase price

Earnest money is essentially a deposit put into escrow when your offer is accepted by the seller. It tells the seller you’re serious about your offer. Once the contract is signed, you can lose it if you back out for any reasons not agreed upon in the contract.

Closing costs: 3-6% of the purchase price

Closing costs are the fees that the buyer pays. Sometimes they're called settlement fees. There are a variety of fees: Title, title insurance, escrow, appraisal, credit report, county recording, attorney, mortgage insurance, mortgage lender and broker.

Home inspection: $300-$500

The home inspection takes place after the seller and buyer sign the contract on the house. There is typically a time period for this inspection.

Down payment and PMI

A down payment is a certain percentage of the home's purchase price that you pay in cash. Your down payment amount will depend on the type of loan and whether you plan to pay private mortgage insurance (PMI). By paying PMI each month (it’s built into your mortgage payment), you can qualify for a conventional loan with a smaller down payment (less than 20%). It’s “insurance” that the lender is being paid in case you default on the loan. PMI generally costs .5-1% of the total loan amount per year. This is broken down in monthly payments and added to the mortgage payment each month. Other loans require mortgage insurance premiums which have an upfront and annual fee that is worked into your monthly mortgage payment like PMI.

Cash reserves: 0-6 months of mortgage payments set aside in savings.

Cash reserves aren't always required. It depends on your credit score and the type of loan. Although, it is wise to have your own emergency fund set aside with money to cover your expenses for several months. The money isn’t paid to the lender, but they do need documents that verify you have the funds available.

Prepaid property taxes and homeowner insurance (tax rates and insurance laws vary.

Lenders put money aside from your mortgage payment for real estate taxes and homeowner insurance. This goes into escrow for future payments. If you’re setting up an escrow account for insurance and tax payments, which 80% of borrowers do, then most lenders will require advance payments for taxes and insurance. Insurance and tax fees are collected upfront for future payments. After you pay the initial fees, the fees collected in your monthly mortgage payment replenish the escrow account. Example: If the taxes are $200 per month, and the lender requires six months in escrow, your prepaid expense at closing is $1200. al. Some lenders will require you to pay a full year of your homeowner’s insurance up front. On average, homeowner’s insurance premium in the U.S. is around $1000.

Utility adjustments: Will vary.

These expenses might include paying the seller an adjusted amount for the HOA fee they paid for the year or reimbursement for pre-paid utility fees.

Here’s simple example of a $250,000 home. It breaks down how much cash you need to close with different loan programs and down payment amounts.

For this example, we used national averages for insurance and property taxes

Cash for:	Conventional Loan 3% down	Conventional Loan 20% down	FHA 3.5% down	VA Loan 0% down
Down payment	$7,500	$50,000	$8,750	$0
Closing costs (3.5%)	$8,750	$8,750	$8,750	$8,750
Cash Reserves	$3,000	$2,200	N/A	N/A
Pre-paid Insurance (1yr) National average	$1000	$1000	$1000	$1000
Property taxes (3 months based on national average)	$415	$415	$415	$415
Total Amount Cash to Close*	$20,665	$63,165	$18,915	$10,165

*This doesn’t account for any credit/refund for earnest money

Summary

The bottom line, when it comes to cash, is that you can’t buy a house without it. Just how much cash you need is specific to the terms of your loan. Sometimes closing costs can be rolled into the loan. Down payment assistance for first-time home buyers can significantly decrease the amount of cash you need to close if you qualify. If you’re planning to purchase a home, take the time to learn about the different loan programs’ fees and down payment requirements.

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