FINANCIAL WELLNESS

3 min read

Sep 2021

Money You Need Upfront to Purchase a Home

WHAT YOU'LL LEARN

How much money you'll need for your down payment

A common misconception about down payments

The closing costs of purchasing a home

WHAT YOU'LL LEARN

How much money you'll need for your down payment

A common misconception about down payments

The closing costs of purchasing a home

There’s a long list of items and information you will have to quickly produce when purchasing a home and taking on a mortgage. For example, 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’re also required to 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.

For any first-time homebuyer, knowing your upfront costs before sending in the initial application is crucial. The earlier you understand the immediate costs of buying a home, the more time you’ll have to gather the necessary funds. But you might be wondering, what exactly are these two 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. Your down payment is your first investment in the home and illustrates a percentage of the purchase price you can pay for now.

So, for example, your 20% down payment on a $285,000 house means you’re paying $57,000 upfront.

Most mortgages provided by lenders 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 presumption that most loans demand 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 with a minimum credit score of 580.

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, low-, or no-interest loans and are typically reserved for first-time homebuyers. Usually, they’re run 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 toward making your down payment. Ask your lender for help on these possible areas of assistance.

Inspections and Appraisal  

Prior to closing or at the time of service, 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 only become privy to the home’s electrical or plumbing issues when it’s too late. 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. Speak with your borrower to get an approximate cost. Additionally, you might want to contact an appraiser to assess your home for its true value in relation to market. An appraiser will inform you if you’re getting good value with 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 your lender will provide the estimated cost. Among other things, 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 the services they provided. 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.

So again, if your home costs $285,000, you can plan on the closing costs ranging anywhere from $5,700 to $17,100.

But don’t worry, you won’t be left in the dark on the price of your 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. The closing costs may fluctuate between the application process and closing, but the Loan Estimate should give you a good approximation of the amount you will owe. The Loan Estimate and Closing Disclosure will each be sent to you from your lender.

Remember, 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, and knowing how much money you’ll need to set aside early for your new home will give you a better idea of what to expect later on and what you can afford at the closing table.