Money You Need Upfront to Purchase a Home

There’s a long list of items and information you must come up with quickly when purchasing a home and taking on a mortgage. You’ll need to present a valid form of ID, such as your driver’s license or passport, to verify you are who you say you are. You must also provide proof of at least two years of stable employment. And, of course, you’ll likely need to have a sum of money upfront for two separate costs related to your new property.

Knowing these upfront costs before sending in the initial application is crucial for any first-time homebuyer. The earlier you understand the immediate costs of buying a home, the more time you’ll have to gather the necessary funds. So now you might be wondering, what exactly are these fees?

Down Payment 

When initially purchasing a home, not all the money contributed to the buyer’s side of the transaction will come from the lender. You will have to offer your own sum of money known as a down payment.

The down payment is your first investment in the home and illustrates a percentage of the purchase price you can pay for now.  

Most loan programs require a specific percentage for your down payment, but that’s not the case for federal loans. VA and USDA loans are 100% financed, which means the borrower does not have to make a down payment.

Additionally, there’s a common misconception that most loans require at least 20% for your down payment. This, however, is not the case.

Certain Conventional loan programs require as little as 3% down payment, and FHA loans, common amongst first-time homebuyers, only call for a 3.5% down payment.

Keep in mind, if you make an earnest money depositA deposit made to the seller that represents your good faith to purchase a home.earnest money depositA deposit made to the seller that represents your good faith to purchase a home., that amount will be applied to your down payment or closing costs. There are a few ways to get help on your down payment, too.

Down Payment Assistance programs can be grants or low- to no-interest loans and are typically reserved for first-time homebuyers. They’re usually overseen by organizations like your local or state housing authority or a nonprofit.

Using gift funds from a relative or other source (depending on the loan program’s rules) is also an option for making your down payment. Ask your lender for help on these two possible areas of assistance.  

Inspections and Appraisal  

Before closing, you’ll be expected to pay out-of-pocket for your home’s inspections. One or several qualified inspectors will visit to check your home for damage in a few distinct areas. Some of the different types of inspections include: 

• Home inspection 

• Pest inspection  

• Radon inspection  

• If applicable, well or septic inspection 

• If applicable, a survey of the land 

Once you close on your home, fixing any issues becomes your problem, so it’s best to learn about them early before you and your family settle in. You wouldn’t want to learn about your new home’s electrical or plumbing issues when it’s too late.

The cost of inspections vary, but typically, they’re no more than $500. Lenders don’t normally require their borrowers to have the home inspected, and if the seller declines to fix any issues reported by the inspector, you have the option to rescind your offer.

Additionally, you might want to contact an appraiser to assess your home for its true market value. An appraiser will explain if you’re getting good value on your purchase.

Lenders generally require appraisals to ensure the loan amount is fair for both sides. Once again, the borrower is expected to pay for the appraisal, and it generally ranges from $300-500.  

The appraiser will assess the home’s:  

• Location  

• Square footage  

• Condition  

• Amenities  

Closing Costs  

As you wrap up the mortgage process, there will be a few charges from your lender for all their services. Also known as settlement costs, closing costs encompass everything from title search and appraisal fees to property taxes and insurance. Typically, they account for around 2-6% of your home’s purchase price.  

But don’t worry! Your lender won’t leave you in the dark on how much you’re racking up in closing costs. The estimated amount will be spelled out in the Loan EstimateThe three-page form that outlines all the details of your prospective loan.Loan EstimateThe three-page form that outlines all the details of your prospective loan. shortly after submitting your mortgage application and again in the Closing DisclosureThe five-page form that outlines the final terms and cost of the mortgage.Closing DisclosureThe five-page form that outlines the final terms and cost of the mortgage. right before closing.

Closing costs may fluctuate between the application process and closing, but the Loan Estimate should give you a good approximation of the amount you’ll owe. The Loan Estimate and Closing Disclosure will each be sent to you from your lender.  

Expert Tip

You can ask the seller to either lower the purchase price or cover some or all your closing costs. If the seller is motivated or only received a few offers on the home, they may be willing to pitch in.

Buying a home can be intimidating, but knowledge is power! Knowing how much money you’ll need to set aside upfront for your new home will give you a better idea of what you can afford at the closing table.

Reach out to our team today to learn more about homebuying’s upfront costs!