Assembling the Mortgage Puzzle: How Much Money Do You Need to Buy a House?

How much money do you need to buy a house

Beginning the home buying journey comes with lots of questions. What’s the housing market look like right now? How are interest rates? How much money do you need to buy a house? 

Our incredible loan officers at Bison State Bank are here to help answer all of your burning housing questions. We are committed to helping you take the first steps toward a better future, and finding the right home loan is a huge part of that journey. 

Piecing together the right mortgage for your scenario is like putting together a puzzle. It’s a lot easier to assemble the full picture when you’ve got all the right pieces and an idea of what you’re trying to create!

Here’s an easy, step-by-step guide to understanding how much money you will need to buy a house.

Step 1: Lay the pieces out in front of you

You can’t assemble your puzzle if you don’t have all the pieces. The same goes for finding the right mortgage and answering questions like “how much money do you need to buy a house?”

Here are a few of the pieces you need to start with.

Proof of income

Before talking with a loan officer about a mortgage, you will need your latest pay stubs as well as your most recent tax return or W-2 form. There are also some cases where your lender may require a proof of income letter from your employer, especially if you have recently changed jobs. 

Proof of assets

One of the fundamental principles at Bison State Bank is helping people find the right loans for their needs. Getting a thorough understanding of your current financial situation helps us determine what kind of loan you may need and how much house you’re able to buy. 

Your prospective lender will want to see bank statements and investment account statements to make sure you have the funds for the down payment and closing costs. This is an important step toward calculating how much money you need to buy a house.

Credit report

Your credit report contains information such as your personal identification, credit account information, collection items, and public records. Lenders use the information on your credit report to get a better picture of your financial situation and determine whether to lend you money or not, and what interest rates to charge on loans based on their own financial risk of doing so. 

Make sure your credit reports are not frozen, as we will verify with all four major credit bureaus during the pre-approval process.

Unlike other lenders, however, the team at Bison State Bank doesn’t just see you as a number on a piece of paper. We take the time to get to know your situation and do our best to understand your goals to set you on the best path toward the future you envision. 

Learn more about how credit affects your home buying power

With these cornerstone pieces of the puzzle laid out, we can start building your overall mortgage picture. 

Step 2: Assemble the frame (Pre-approval)

After we’ve got all the information, the next step toward finding your mortgage is a pre-approval. Simply speaking, a mortgage pre-approval is a preliminary evaluation of your potential buying power. With this information, buyers have a better understanding of what level of house they can afford, and your realtor can adjust their showings to better fit your needs.

Wisdom from Bison State Bank Loan Originator John Nelson: We really try to take our time with this initial loan estimate. We don’t just determine a rate and see how much you can afford, we also do our diligence in finding accurate appraisal fee information for your area and other closing costs. This way there’s no surprises down the road when it comes time to close. 

At Bison State Bank we provide pre-approvals rather than pre-qualifications. A pre-approval goes further than typical pre-qualifications. We take the hard information you provide about your financial history and see just how much you can borrow based on your financial situation. 

During this process, we will also ask you three important questions that will help determine your loan:

Q: Are you a first time home buyer?

Most first-time home buyers don’t have the equity for a large down payment on a house. Knowing this helps us determine which type of loan is best for you.

What is equity?

Equity is the difference between what you owe on your home and the amount your home is actually worth. Current homeowners are constantly building equity with mortgage payments and rising housing costs, and they can use that equity either by refinancing or selling their home ahead of buying a new one.

Q: Are you a veteran?

The Department of Veterans Affairs works with private home loan lenders to guarantee affordable home loans and other housing-related loans to help veterans buy, build, repair, retain, or adapt a home for personal occupancy. The VA guarantees a portion of the loan for these private lenders, allowing those lenders to provide more favorable terms to veterans. 

The key pillars of loans provided by VA home loan lenders include:

  • No required down payment
  • Competitive interest rates lower than industry average
  • Limited to no closing costs
  • No required private mortgage insurance

VA home loans are also guaranteed as a lifetime benefit, meaning veterans can use these benefits multiple times throughout their life.

More about VA Home Loans

Q: What are your long-term goals?

Even if you have the money for a large down payment when buying a home, it might not be beneficial to use all of that money right away. In fact, in a market with historically low rates, you might actually be hurting your financial situation by putting more money into your down payment. 

Think of it like this: you can invest your money in something that makes more money, or something that doesn’t. Building your equity is a good way to improve your financial situation, but you don’t need to drain your entire savings account to put 20% down on a mortgage if you don’t need to. 

Private mortgage insurance

For borrowers on a conventional loan, private mortgage insurance is usually required when you make a down payment of less than 20% of the purchasing price. This is typically added to your monthly payment, and after you have built up a 20% equity in your home your private mortgage insurance is typically canceled. 

We ask all of these questions because we truly care about setting you up with the best home loans for your situation. Once we have all of the information we need for your application, our loan officers will deliver a pre-approval within 24 hours that will tell you almost to the dollar amount how much money you need to buy a house.

Step 3: Fill in the puzzle

Once you’ve got the framework done and your pre-approval in hand, you have a much better understanding of your home buying power. Now we can start really putting together the pieces and find the best home loan for your needs. 

Here’s a look at some of the different types of loans we may recommend:

Conventional 30-year fixed loans

A conventional 30-year fixed home loan is the most popular loan in the United States today. These loans have a “fixed” interest rate that doesn’t change for the life of the loan, making it an ideal choice during times of low interest rates. 

Conventional 30-year fixed loans are great choices for home buyers who want a low monthly payment, and the flexibility to repay the loan faster by adding to monthly payments. These loans can be secured with as little as a 3% down payment. 

Conventional 15-year fixed loans

Just like the 30-year fixed loan option, a conventional 15-year fixed loan has the same interest rate over the life of the loan. You can use these kinds of loans when refinancing your old mortgage, and they can have even lower interest rates than their longer counterparts. 

A 15-year fixed loan will have a higher monthly payment, however, because there is less time to pay the loan off. 

FHA Mortgage

An FHA loan is a mortgage backed by the United States government to help make homeownership possible for borrowers who don’t have the means for a large down payment or excellent credit. Borrowers can qualify for an FHA loan with a minimum of a 500 credit score with a 10% down payment, but a 3.5% down payment is acceptable for 580 credit scores and above. 

FHA loans require two mortgage insurance premiums: one that is paid up front, and another that is paid annually for the loan if you put less than 10% down. 

VA Loans

All uniformed service members are eligible for VA home loan benefits, including members of the Army, Navy, Air Force, Marines, Coast Guard, Space Force, National Oceanic Atmospheric Administration (NOAA), and Public Health Service.

The main benefits of VA home loans include no required down payments, lower interest rates, no private mortgage insurance, and limited to no closing costs. 

Step 4: Completing the picture

After you’ve found your loan type, decided on a house and had your offer accepted, there are still a few things to keep in mind to complete your mortgage puzzle. These final factors are huge when determining how much money you actually need to buy a house.

Closing costs

Your down payment isn’t the only money you will owe to complete your home buying process. Closing costs refers to the processing fees you pay to your lender for creating your loan. Other closing costs include inspection fees and appraisal fees. Usually closing costs are 3-6% of your total purchase price. 

Lender credit

Lender credits are an arrangement where the lender agrees to cover part or all of your closing costs. This typically leads to a higher interest rate on your loan. 

This is an advantageous way to offset closing costs if you can’t afford paying the extra 3-6% of your purchase price on top of your down payment. You can even increase your down payment and or invest your money in other ventures. 

Still trying to find out how much money you need to buy a house? Contact the experts at Bison State Bank!

We know solving the mortgage puzzle is a difficult process, and everyone’s puzzle is a little different. That’s why Bison State Bank is here to help. 

Our mission is to be your first step to a better future. We have a trusted and experienced staff of professionals that can guide you through the entire process, whether you are a first time home buyer or are looking to refinance your home for a better rate. It doesn’t matter if you have the best credit score for buying a house or if you just meet the loan requirements. You deserve nothing less than our honesty, integrity, and experience.

Ready to get started? Let us get to know a little more about you and what you’re looking for, and we will give you a free custom mortgage rate quote.

A special thank you to our Loan Originator, John Nelson, for providing his expertise on this topic.