One of the first questions I hear from people thinking about buying their first home is:
“How much money do I actually need?”
It's a good question—and the answer is rarely as simple as a down payment percentage.
After more than 25 years in mortgage lending, I've worked with many buyers who assumed they needed far more cash than they actually did. I've also worked with buyers who were surprised to learn that there were expenses beyond the down payment that needed to be considered.
Before you decide you're ready—or decide you're not ready—it's worth understanding where the cash in a home purchase actually goes.
1. Your Down Payment Is Only One Part of the Equation
The down payment is usually the number buyers think about first.
You may have heard that you need 20% down to buy a home. That's simply not a universal requirement.
Depending on the borrower and loan program, mortgages may be available with considerably smaller down payments, and certain eligible borrowers may have access to financing that doesn't require a down payment.
The right amount to put down depends on more than reaching a minimum.
I like to look at the buyer's overall financial picture. Putting additional money down may reduce the loan amount or monthly payment, but using every available dollar for the down payment may leave the buyer with very little cash after closing.
Sometimes preserving liquidity matters too.
2. Don't Forget About Closing Costs
In addition to the down payment, buyers should plan for closing costs.
These can include expenses associated with obtaining the mortgage and completing the real estate transaction, such as lender charges, appraisal costs, title-related expenses, recording charges and other applicable costs.
The exact amount varies based on the loan, property, location and transaction.
This is one reason I hesitate to give buyers a single percentage and say, “That's all you'll need.”
It's better to estimate the actual transaction.
3. Prepaid Expenses Can Add to the Cash Needed at Closing
Some of the money collected at closing isn't technically a closing cost.
For example, a borrower may need funds for items such as prepaid interest, homeowners insurance and initial deposits into an escrow account for property taxes and insurance, depending on how the loan is structured.
These amounts can vary based on factors including the property, tax schedule, insurance premium and closing date.
They're easy to overlook when you're calculating your home-buying budget on your own.
4. Earnest Money Usually Isn't an Additional Down Payment
When an offer is accepted, a buyer may provide an earnest money deposit according to the purchase contract.
First-time buyers sometimes worry that this money is completely separate from everything else they need.
Generally, properly documented earnest money is credited toward the buyer's funds due in the transaction at closing, subject to the terms of the contract and applicable requirements.
So if you've already made an earnest money deposit, we take that into account when determining how much additional cash may be needed.
5. Gift Funds May Be an Option
Some homebuyers receive help from family or another eligible donor.
Depending on the mortgage program and circumstances, gift funds may be permitted for some or all of the funds needed for a home purchase.
There are rules regarding acceptable donors, documentation and the transfer of funds, so this is something to discuss with your lender before money starts moving between accounts.
A well-intentioned transfer that isn't properly documented can create unnecessary questions during underwriting.
6. Seller Concessions Can Affect the Numbers
Depending on the transaction and loan program, the seller may agree to contribute toward certain buyer closing costs.
These are often referred to as seller concessions or seller contributions.
The amount permitted can depend on the loan program, transaction and other factors.
Seller concessions aren't guaranteed, and whether requesting them makes sense can depend on the local market and the strength of the offer.
But they're an important part of the financing conversation because they can change how much cash a buyer ultimately needs at closing.
7. Keep Some Money for After Closing
This is something I particularly encourage first-time buyers to think about.
Buying the house isn't the end of your expenses.
You may need money for moving, furniture, utilities, repairs, maintenance or the unexpected things that tend to appear after you receive the keys.
If putting every available dollar into the transaction leaves you without an emergency cushion, it may be worth discussing whether another financing structure makes more sense.
The goal isn't simply to get into the home.
It's to be comfortable owning it afterward.
8. You Don't Have to Guess
Online calculators can be helpful, but they can't know all the details of your situation.
Two people buying homes at the same price could need different amounts of cash because they're using different mortgage programs, making different down payments or purchasing properties with different taxes, insurance costs and transaction terms.
That's why I prefer to work backward from the actual buyer.
We can look at what you've saved, what you want to keep in reserve, the price range you're considering and the financing options for which you may qualify.
Then we can estimate the numbers before you start making offers.
Don't Let the 20% Myth Keep You From Asking
One of the biggest mistakes a prospective first-time buyer can make is assuming they aren't financially ready without ever checking.
You may need more money than you currently have.
You may discover that waiting and saving is the right decision.
But you may also learn that homeownership is closer than you thought.
The best way to find out is to look at the actual numbers rather than relying on a rule of thumb.
If you're thinking about buying your first home in Maryland or another area where I'm licensed, I'm happy to help you understand what the upfront costs could look like and what financing options may be available.
Stuart Kiehne
President | Mortgage Loan Officer
Redwood Mortgage Services
NMLS #92008
www.Redwood-Mortgage.com
All loans subject to approval. Program availability, terms and qualification requirements may vary. Equal Housing Lender.
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