How Much Money do I Need to Buy a Home?
This is a question that I think people are either afraid to ask or simply don’t know where to start in gathering information. I’m going to attempt to provide a clear picture of where the money comes in, where the money goes out, how much and when. All valuable pieces to the puzzle! This is a great tool for first time homebuyers and a wonderful refresher for repeat buyers, because let’s be honest, after a deal closes most of the details of how you got to the finish line go fuzzy!
Mortgage Funds
Provided that you are not a cash buyer, this is going to be the biggest chunk of funds coming in to play to help you purchase your property. One of the very first steps in the home buying process is to talk with a lender. I have been in the business since 2010, and I have a handful of wonderful lenders to connect you with. They will help you fully understand what your purchasing power is and what type of loan you qualify for.
Many buyers believe that they need 20% down to purchase a home. This is absolutely not the case. There are great loans out there with fabulous interest rates with minimal down (think 3%-10%). For example, when I purchased my first home, I put down 8.5%. In the offer, I stated that I was putting down 5%, but I ended up squeezing a little extra cash and put down a tad more. I got a great interest rate, and my offer was well received by the seller.
Credit Score and Down Payment amount will all play a part in interest rate. Nevertheless, at these record low interest rates, it is smarter in most cases to get into a property and start gaining equity rather than wait on getting in the game.
Down Payment
The down payment is probably the most common term discussed when people are thinking about purchasing a home. In order to close the gap between your loan amount and the purchase price, you need a down payment. If you have been considering a purchase, you have probably repeated in your head numerous times “I just need another month, year, 2 years, etc. to save up for a down payment”. In many cases you may need that extra time, but as I stated above, this amount does not need to be 20% as many believe. This can be less or more depending on your financial picture at this certain point in time. Talk with me and your lender to see what a realistic goal and timeline may be for what you want.
I will highlight that pushing to the 20% down payment number frees buyers of having to pay the PMI charge on their monthly payment. Private Mortgage Insurance protects the lender against losses if you default on your mortgage. However, if you put down less than 20%, once you have at least 20% equity in your home, you can request that the PMI be removed from your monthly charge. We did this on our home recently and it only took us a few years to get from 8.5% equity at the closing table to over 20% equity on our home! And we didn’t throw money out the window on rent in the meantime!
Earnest Money
During the offer process, the buyer proposes an amount for Earnest Money. This is a term of negotiation in the deal. This money can help show just how serious a buyer is about a property. In our market, this typically is 1.5%-3% of the offer price, but I have seen people shoot past that 3% if it just doesn’t feel like enough.
The Earnest Money is protected throughout the deal under your contingencies. Some contingencies include the Due Diligence period, the financing contingency and the appraisal contingencies. There are many more contingencies out there, but these three are the most common used in a transaction. During these different timelines, if the buyer must terminate the deal for those reasons outlined in the contingency, the Earnest Money is returned to the buyer in full. If, however, the buyer fails to close the deal outside of their contingencies, the seller gets to keep these funds as “liquidated damages”.
The Earnest Money is paid by the buyer either at the time of offer or within a few days of the contract going binding. The money is held by either an agent’s broker, the closing attorney or an agreed upon third party. The majority of the time it is with an agent’s brokerage. Earnest Money must be held in a Trust Account.
The Earnest Money funds are not lost funds, they are credited to the buyer at closing and will go towards the purchase of your home. For example, if you have $50,000 set aside for your down payment and you write an Earnest Money check for $10,000, at the closing table you will need to wire the remaining $40,000 to add up to your entire down payment.
Note that with new construction homes, the Earnest Money calculation can be a different animal. Some builders may require a non-refundable amount that could be somewhere closer to 15%-30%. Every builder is different, so it is important to ask the rules associated with any sort of deposits up front.
Closing Costs (including Escrow Funds)
In addition to your down payment, closing costs are a buyer’s cost paid at the closing table. Your lender will give you a better idea of what your estimated cost to close will be, but below is a list of what you can expect and estimated values. I am using very round numbers as these can vary deal to deal! You can negotiate for the seller to contribute towards your closing costs if needed. A very general rule of thumb would be 2% +/- of the purchase price. The higher the price point, the lower the percentage will tick. See below for a list of factors that contribute to your closing cost total.
Lender Fees - A total and breakdown of these fees can be obtained from your lender, but include things such as application fee, processing fee, underwriting fee, origination charges, etc.
Attorney Fees - All property purchases are run through a real estate attorney. The attorney fees include settlement fee, title exam fee, document prep fees, etc.
Property Taxes - This will either be credited or debited depending on closing date and when property taxes are collected for the year. This is the portion of the property taxes that you are responsible for during your ownership of the property for that calendar year.
Prepaid Items - 6 to 12 months homeowners insurance and interest for the remainder of the month’s mortgage
Title Insurance (lender and owner) - Lender’s Title Insurance is required by all mortgage lenders. However, Owner’s Title Insurance is a one-time charge for the protection of one of your largest investments, as well as peace of mind. The insurance will protect the owner against any defects in title which may not have been detected by the title exam.
Initial Escrow Funds - If you are setting up an escrow account with your lender, your will need to make an initial deposit into this escrow account. The lender wants you to cushion the account for future property tax and insurance payments.
Recording State Charges
Transfer Tax: $1 per $1,000 of the purchase price
Intangible Tax: $1.50 per $500 of the loan amount
Harry Norman Fee - Buyers are charged a $225 HNR flat portion of the commission at closing. Any other commission is paid by the seller.
Condo/Home Owners Association Fees (if applicable) - If you are purchasing a property with an HOA, there may be fees charged at closing. Including initiation fee, transfer fee, initial HOA dues payment, etc.
Buyer Costs While Under Contract
While you are under contract on a property, you are going to want to do some research on what you are buying. Below are some examples of those charges.
Home Inspection - A home inspection can run $450-$650 depending on the company you choose and size of the home. For extremely large homes or estates, this could potentially be higher. Inspection companies will have option add-ons that you can choose to include. Most common add on would be a radon gas test for around $150. If the inspection reveals any items that you want a specialist to come and take a look at, you may need to pay for them to make the trip for diagnosis (i.e. roofer, structural engineer, plumber, etc.).
Appraisal - Your lender will order an appraisal of the home. These can run $450-$650 depending on the lender and/or third-party appraisal management company that they use.
Termite Inspection - Some deals may require a termite letter. If you aren’t getting a termite bond from the seller, a termite letter/inspection would be a good idea. These are around $150. If you want to establish a termite bond on the property once you own the home, the initial cost to establish the bond can vary
Land Survey - Prices vary greatly depending on lot size and can range $600-$1,000. A survey of your property is not required. However, I always suggest that my buyers obtain one. The survey is like a map of your property. It will identify property lines, easements, encroachments, flood zones, water buffers, building lines, etc. It is always best to get a survey done during due diligence because buyer can terminate for any discovery. If after due diligence, title issues are the only reason a buyer can terminate. If time is on our side, we can wait to order survey, but typically, we need to order right away if you want one during due diligence.
Please feel free to reach out for any further explanation or to brainstorm a plan for your purchase. Having a guide with you from the very beginning can help clear up confusion and help you feel confident moving forward!
