There are a lot of questions to consider when purchasing a home, but the number one question most potential homebuyers ask, or want to ask but are too afraid to, is “How much cash do I need to purchase a home in Illinois?”

The answer is far from simple, as there are so many variables in every home transaction. However, to avoid the old cliche of hedging completely, let’s look at some of the expenses and variables every homebuyer should prepare for, and in doing so we can get a much better idea of just how much cash you will need to buy a house.

First, we must break down each of the major expenses in the home buying process. This will hopefully be revealing in terms of what you can expect the expenses of your specific situation to be. By the end of this blog post, you will be able to determine what your own minimum requirements will be and how much money you need to purchase your house.

Let’s go over the loans and requirements.

The Down Payment

The down payment will vary depending on your credit score, the loan program, lender and your available funds. First time homebuyers often choose a 3-5% down payment.

Example= 3% down payment of $250,000 home is $7,500

Example= 5% down payment of $250,000 home is $12,500

However, any down payment under 20% will require PMI (Private Mortgage Insurance).

Private mortgage insurance is an additional monthly expense added to your mortgage. It is insurance that guarantees a borrower’s loans if the down payment is under 20%. The cost of the insurance varies. but typically, you can expect $30-$70 per $100,000 borrowed.

The Two Most Common Loan Types: Conventional Vs. FHA Loans:

Your down payment will be dependent on your type of loan. The two types you are most likely to come across are conventional loans and FHA loans:

• The Conventional loan is a government-guaranteed loan that usually needs a minimum down payment of 3%. Typically, borrowers need a credit score of 620 or above to qualify for a conventional loan.
• An FHA loan requires a minimum down payment of 3.5% while your credit score will only need to be 580. FHA loans require additional paperwork and home condition requirements.

Although regulations are set at the federal level, individual lenders may have tighter restrictions than stated above. I would suggest meeting with multiple lenders and reviewing offers to make sure you have taken advantage of all your options. Keep in mind minimum requirements might also be accompanied by higher rates.

Zero Percent Down Payment Options:

The two most common 0% down payment options are VA Loan and USDA Loan programs.

Both the VA loan and the USDA loan require no down payment and are programs guaranteed by the U.S. government.

• The VA loan has no minimum down payment and no minimum credit score requirement. It is offered to all veterans, military members, spouses of veterans, and military members. Along with 100% financing, VA loans offer low-interest rates and don’t charge annual mortgage insurance
• The USDA loan program also offers a no down payment loan, but it requires a credit score of 640 or above. The USDA loan program is offered only for homes in more rural parts of the country. But what areas may be classified as rural can come as a surprise, so this is still an option to consider in certain areas. Borrowers also need to fall under a set income threshold to qualify for this program.

Additionally, there are often down payment assistance programs available locally. Check with your lender and realtor to see if you are able to take advantage of any of those programs.

Where Can Down Payments Be Drawn From?

There are two sources of down payment funds that generally can be more difficult to use: cash and unsecured loans.

If you saved your down payment under a mattress or in an actual piggy bank, you might have trouble providing a paper trail of the funds. All unverified funds may be considered illegitimate funds and must be passed through a financial institution to be used.

Unsecured loans are also a terrible source for your down payment. The loan will add to month obligations and will indicate your inability to accumulate funds. Don’t try to pull a fast one on your lender. They are going to go through your financial statement in detail and you will get denied the loan.

Approved Sources of Down Payment Funds

The following are commonly approved of sources of down payment funds:

Personal Account

If you have been saving for your down payment and have a long record of consistent deposits, your personal checking and savings accounts may be sufficient for your down payment source. Remember to take the sum of both you and your partner’s accounts to determine your potential total down payment amount. Personal accounts are often the easiest and best option for down payment sources.

Family Gift

Your mom, dad, sister, brother, in-laws, or even grandparents can contribute to your down payment requirement. Many lenders are ok with gift money, as long as the gift money will not need to be paid back. Additionally, the lender may also require a gift letter from the family member. The IRS allows people to give gifts of up to $15,000 without paying taxes on it.

Retirement Accounts

If you are a first-time home buyer you might be able to withdraw from a traditional IRA, Roth IRA or 401K without the 10% early withdrawal penalty. Talk to your lender about all your options and fees regarding your specific situation.

What Are Typical Closing Costs?

Most homebuyers second largest expense after their down payment will be closing costs. This is by far the most overlooked and hardest to understand potential cost. Closing costs in Illinois vary, but the average closing cost is 2-3% of the home’s sales price. Closing costs vary depending on the lender, loan and the city or town your home is in.

Closing costs can include any of the following depending on your situation:

• Title searches $300-$600
• Title insurance $1,100- $1,600
• Home inspections $300-$600
• Appraisals $300-$400
• Surveys $500-$700
• Credit reports $50-$60
• Attorney fees $500-$650
• Transfer tax and State taxes – Illinois state tax is .1% and city taxes vary on location.
• $250,000 X .025 = $6,250

The average closing cost across the Chicagoland area for a home worth $250,000 is $6,250.

To get a detailed estimate on the closing costs of homes in your desired area, consult with a local realtor or lender. For the purpose of this blog, we will be averaging out the closing costs for a $250,000 dollar single-family, Chicago home, using a median of 2.5% closing costs, the average closing cost would come to $6,250.

Cash Reserves Needed?

Even if you have sufficient income to meet your loan obligations your lender will require you to have more in reserve. Cash reserves, like many of the other topics on this blog, will have varying needs. However, the most typical cash reserve requirement is equal to two months’ rent payments.

Take for example if your mortgage including principal, interest, taxes, and insurance came to a total of $1,500. Most lenders would like to see at least $3,000 in reserves to cover your housing expense.

Cash reserves could mean actual liquid funds in a savings or checking account or could also include stocks, bonds, mutual funds, or certificates of deposits. Basically, banks are interested in anything that could quickly be turned into cash in a pinch. The exact amount you will need will depend on your loan type, your credit, and the down payment.

On FHA loans you will need enough to cover at least three months’ worth of payments, while conventional loans can range from 0-6 months of reserve requirement. VA and USDA loans do not require cash reserves; however, you should consider a little cushion to help prevent your American dream from becoming a nightmare.

If You Don’t Have Enough Cash for Your Reserve

If you don’t think you have enough liquid savings to meet the reserve requirements, don’t panic. Talk to your bank, lender, and real estate agent.

Ways to Reduce Your Upfront Cash Requirement:

The savings needed for a down payment to buy a house is often the biggest barrier to entry for first time home buyers. Fortunately, there are ways to lower or reduce your out-of-pocket requirements to purchase your home.

Here are three commonly used tactics to lower your out-of-pocket expense:

1. Negotiate with the seller to help you with closing costs. This is a common method for first-time homebuyers. however, you can’t always count on its success. This is especially true in a hot seller’s market when this strategy is less appealing to sellers who may be fielding multiple competitive offers. Nevertheless, a properly negotiated transaction might leave room for a seller’s concession. There are limits to the total concession allowed depending on the loan.
2. Use Gift Money. As mentioned above, family gifts are a common method of down payment assistance. There is no shame in asking for a gift from a family member that is willing to help. A family gift could give you the key to homeownership and be to build equity.
3. Look for down payment assistance and closing cost assistance programs. Every state has programs intended to help lower-income or first-time homebuyers buy their first home. For example, in Illinois, one process that can assist with down payment and closing cost assistance is the IHDA Mortgage loan program.

Conclusion

I hope this post was helpful and gave you an idea of how much money you need to buy a home.

Although we have discussed the minimum amount of money required to close, I would recommend having more in savings than the minimum.

The purchase of a home should not be an idea you come up with overnight, it should be a well-thought-out and prepared financial move. That is why every home purchase should first start with a proper budget and savings plan. If you are in the Chicagoland area, I would be happy to assist you on your homeownership journey.