How much money do we actually need saved to buy a home?
There isn’t one number. There are three, and only one of them is the down payment. You’re saving for the down payment, the closing costs, and the prepaid taxes and insurance that start your escrow account.
Massachusetts adds a fourth thing to plan for, and it’s a date rather than an amount, because most sellers here ask for a deposit totaling 5 percent of the price at the Purchase and Sale signing, weeks before you close. On a one-unit home you’ll live in, a documented gift can cover the whole down payment.
Where Does the Money Go?
The down payment has the lowest floor. FHA starts at 3.5 percent, measured against the property’s adjusted value, not the sale price. A conventional loan on a one-unit home you live in can run to 97 percent loan-to-value, which is 3 percent down.
Closing costs are where most of the surprise lives. Skip the 2 to 5 percent rule of thumb, because nobody printing it will say where it came from. The CFPB’s real list is appraisal fees, title insurance, government taxes, and prepaid property taxes, homeowners insurance and the interest before your first payment. Our closing costs calculator uses your price, town and loan type.
The third bucket starts your escrow account, and it’s cash for bills that aren’t due yet. Your lender can also collect a cushion, capped by federal rule at two months of what the account pays out.
When Is the Money Due?
Massachusetts buys houses in two steps, and the timing catches more buyers than the total does. You write a small binding deposit with the Offer to Purchase, customarily $1,000. A week or two later you sign the Purchase and Sale, and most sellers ask for the balance of a deposit that customarily totals 5 percent of the price. On a $400,000 house that’s roughly $19,000 more, and closing may still be a month out.
None of that is an extra cost. The deposit waits in escrow, and the closing credits it toward your down payment. The problem is liquidity. A couple who saved 3.5 percent for closing day can hear a request for 5 percent in week three. It’s also at risk if you walk away without a contingency protecting you.
Worth settling before you write an offer:
- Where the deposit money is sitting, and how fast you can move it
- If the down payment is your savings, a documented gift, or both
- Which contingencies your attorney wants in the offer itself
How Much Has to Be Your Own Money?
Less than the folklore says, on the loan most first-time buyers use. On a one-unit home you’ll live in, above 80 percent loan-to-value, Fannie Mae’s guide asks for no minimum contribution from your own funds, so a documented gift can fund the whole down payment. Buy a two- to four-family or a second home and 5 percent has to be yours.
The gift has to come from the right person. Family by blood, marriage, adoption or guardianship counts, and so does a domestic partner or a fiance. The builder, the developer and the agent never do. On an FHA loan, gift funds from an acceptable source count toward the 3.5 percent minimum required investment.
MassHousing down payment assistance reaches $30,000 as a deferred second mortgage at no interest, with nothing owed until you sell, refinance or pay it off, or $25,000 as a 15-year second. It’s a loan, not a grant, and it funds at the closing table. Plan around that, because assistance shrinks your closing-day number and does nothing for the deposit due a month earlier. A documented gift can be in your account before the Purchase and Sale, so it covers both.
GoldCoast is a broker, so a pre-qualification costs nothing and commits you to nothing. Worth doing before you’ve decided anything, because the number you’re saving toward probably isn’t the one you need.