It’s easy to get caught up in credit scores when considering a home purchase. But as lenders continue to loosen requirements, the need to have money in the bank doesn’t get any less acute.
Getting prescriptive about how much you need in savings to satisfy a mortgage lender is tough business. The answer can depend on a host of factors, from the type of mortgage and size of the loan to the property itself and more.
You’ll most likely need a solid chunk of change upfront to cover a down payment and closing costs. Lenders might also want to see a stockpile of “reserves,” which often translates to a certain number of months’ worth of mortgage payments.
The bottom line is that it’s tough to talk specifics about your bottom line. That’s why it’s important to get a solid understanding of your mortgage options and seek clear guidance from lenders.
Credit scores are critical, but so are income and assets when you’re applying for a home loan. Here are some of the important savings you’ll need to accumulate first.
Down Payment Needs
Down payments are inescapable for the vast majority of non-cash homebuyers. Outside of state or local programs, only government-backed VA and USDA rural development home loans allow qualified borrowers to purchase with no money down.
Conventional and FHA loans typically require minimum down payments of 5% and 3.5%, respectively. On a $200,000 mortgage, that’s $10,000 for conventional and $7,000 down for FHA. But buyers often put even more skin in the game.
Conventional borrowers last month had an average loan-to-value ratio of 80%, according to mortgage software firm Ellie Mae. For FHA loans, it was 95%. That means buyers are putting down an average of 20% for conventional loans and 5% for FHA loans.
Existing homeowners often have an advantage because they’re able to put the proceeds of a home sale toward a new purchase. It can take first-time buyers years to scrape together enough money for a down payment.
That’s partly why home sales among first-time buyers hit their lowest point last month since the National Association of Realtors began tracking the figure in October 2008.