Do I Need Money in Savings to Buy a Home?

Many prospective homeowners wonder if they need to have money in their savings accounts in order to buy a home. In order to properly prepare for the purchase of a home, we will need to save some money for a down payment and closing costs. Additionally, many lenders will also require 2 to 6 months of reserves remaining in our accounts after all other payments have been made.  “Reserves” are the monthly payment amount, including all taxes and insurance. So, if your payment will be $2000 per month, and you are required to have 2 months of  reserves, you must have $4000 remaining in your account, after all costs and down payments are made.

Cash Reserves

Besides needing money for the down payment on the house, you may also be required to carry some cash reserves. The bank likes to see that you have some money in the bank in case of hard times. They want to know that if you lose your job, you will still be able to keep paying the mortgage. With most conventional lenders, they are going to require that you have at least two to three months worth of expenses in cash reserves. This way, it gives you some time to find a new job if you were to lose your existing one without missing a mortgage payment.

If you are buying a second home, the cash reserve requirement goes up even further. In that case, the minimum is usually six to twelve months of expenses.

100% Financing

100 % financing programs are very rare, but they do exist. In order to qualify for this type of loan, you will usually need an excellent credit score and will typically need to be a first time buyer. Most of these programs will require at least two months of reserves in your bank account after closing.

FHA Programs

If you do not have perfect credit, your next best option is probably an FHA loan. With an FHA-insured loan, you can get a very low down payment. You will still have to have some form of credit, but it does not have to be great. With an FHA loan, you can expect to pay about 3.5% of the sales price as a down payment, plus closing costs. However, standard guidelines do not require reserves in your bank account after paying down payment and closing costs.

Benefits of Using Savings

While you may not have to use your savings, there are some benefits associated with doing so. The biggest potential benefit is eliminating private mortgage insurance. When you borrow more than 80% of the value of the property, your lender will most likely require you to pay for private mortgage insurance. In many cases, this raises your monthly payment by over $100. If you can save up enough to make a 20% down payment, you can eliminate this part of the mortgage payment. You can then focus on paying only the interest and principal on 80% of the total value of the house.