You may be surprised to learn that many buyers in DC don’t put down 20% when buying a home. Many buyers assume that you need to put down 20% but that’s just not the case. Especially in this market, 20% could be a six figure deposit. Instead, I think the magic number for cash on hand is 7%. You may be thinking, “Wait, I thought the minimum down payment is 3%?” You are not wrong. It is 3% but there are other pesky fees that require up front cash– hello, closing costs. Before you begin looking for your dream home make sure you have 7% of the purchase price in cash ready to go.
3% for Downpayment
3% of the purchase price is the minimum downpayment you can make to secure a loan. That figure jumps to 3.5% if you are doing an FHA loan. The drawback to not putting down 20% is that you will be required to pay Private Mortgage Insurance (PMI) until you have 22% equity in the home. This monthly fee does not go towards building principal. Despite the drawback of PMI, many buyers consider this route when buying because saving enough cash to put 20% down can feel like an impossible task.
3% for Closing Costs
3% of the purchase price is a good estimate for closing costs– key word is “estimate.” Your lender will be able to sketch out exactly what to expect at closing but when browsing properties, 3% is a good rule of thumb. What are closing costs? Closing costs are cash payments you make at the time of closing that go towards lender fees, title charges, and taxes. The recordation tax alone is 1.45%. After putting 3% down, make sure you come to the closing table with another 3% to cover these costs.
1% for Miscellaneous
You are going to want another 1% of the purchase price in cash for other miscellaneous expenses and in case any issues popup right after moving in. In a perfect world, you would have more than 1% for anything that came up (because something always does) but I think the overall figure of 7% is a good foundation for beginning your home search.
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