How much will you need to purchase a home? Typically, it’s the down payment that’s mentioned. Seldom are closing costs which includes a home appraisal, lawyer fees, and home inspection costs, brought up so they end up a major surprise for homebuyers.
Luckily, closing costs can be rolled into your mortgage payment, so that’s one less upfront cash chunk you will need. Also lucky is that to have a buyers agent helping you to find a home, and guiding you through the complicated journey from start to finish is free to buyers in most cases. Usually the sellers commission to the home you buy covers that cost! So by all means, take advantage of this free service, because buyer agents help save you time and money, as opposed to going directly through the listing agent of a property, whose priority is to earn the most money in the sale for the seller.
These are a list of all the cash and finances involved when buying a home.
Earnest Money Deposit
You found the home you want to buy and you and your agent structured the perfect purchase agreement. In it, you’ll find a section dealing with your earnest money deposit (EMD). Your agent will list the amount you are paying and where it will be held.
So, what is this? There are several functions of an earnest money deposit. First, it shows the seller that you are serious about pursuing the purchase. After all, he or she will be taking the home off the market. This “skin in the game” evens the playing field. The seller takes a gamble by removing the home from the market and you put your cash on the line with the possibility of losing it, under certain circumstances. The amount of money used for your deposit varies according to several factors, including what type of market you’re in (in fast-moving markets, a larger-than-normal deposit may entice the seller to choose your offer). Typically, it’s 1 to 2 percent of the offering price.
In May of this year the median home price in the U.S. was $345,800, which would mean an earnest money deposit of between $3,458 and $6,916. In Central Massachusetts, most of the buyers I work with use deposits starting at 1,000 for the offer to purchase and then the balance to equal 3 percent of offer price by the purchase and sale agreement, which is about 2 weeks after the initial offer and after the home inspection has been done.
When the seller accepts your offer, your lender will request that they see a copy of the check used for deposit. Down payments are expressed as a percentage of the purchase price of the home. For example, using the national average home price, you will need $69,160 for a 20 percent down payment, $34,580 for a 10 percent down payment, $17,290 if you are required to come up with a 5 percent down payment and $12,103 for a 3.5 percent down payment.
Down payment percentages depend upon the loan you’ll be obtaining. Conventional loans generally require 20 percent down and the best choice if you hope to avoid paying a monthly private insurance premium. However, in the real world, most people buying a home don’t have 20 per cent down, so paying the extra fee for the mortgage insurance until you reach 20 percent equity would be a great alternative to not being able to purchase a home.
Other loans, such as those through FHA or Fannie Mae, require significantly less for the down payment, while the VA and USDA require no down payment, USDA and FHA may have some stricter guideline but many buyers find this their ideal way to begin the journey of home ownership!
Home inspection costs vary by state. In Central Massachusetts, a home inspection usually runs $300-$600. There are minimal extra fees for radon, water tests, mold tests, etc. The important thing to realize is that although the deposit is refundable if something is unacceptable to you and can’t be negotiated with the seller, the home inspection fee is not.
That will be money well spent though! Protects your interests with such a huge purchase you want to know the integrity of home you are buying as well as costs that could be involved if any problems are found.
This is the part of the process that catches far too many homebuyers by surprise. Closing costs are all the fees required of everyone who helps you purchase the home. From your appraiser’s fee to the title company’s research and issuance of a policy and, of course, the lender’s fees. These fees add up – fast – so it’s important to compare closing cost estimates from several lenders.
It’s also important to understand which costs are negotiable. It’s not unusual for closing costs to amount to 2 to 5 percent of the loan amount. Closing costs in Massachusetts could be anywhere from $5,000 to over $7,000 depending on the price of the home. As you can see, closing costs, if not prepared to pay, can come as quite a shock to homebuyers.
3 Ways to reduce closing costs
1. You can reduce a portion of your closing costs by closing as late in the month as possible. Lenders charge interest in arrears, meaning that when you make a house payment, you are actually paying for last month’s interest (and the coming month’s principal).
When you close escrow, the lender will have calculated how much interest you owe from the date your loan was funded to the end of the current month. For example, if you close on your new home on August 15, you’ll pre-pay the interest due from August 15 until August 31. September’s interest isn’t due until October 1, when you will make your first house payment. Reduce the pre-paid interest charge by closing at the end of the month.
2. You can eliminate the need to pay all or part of your closing costs by requesting that the seller contribute. The seller gets to write that amount off as a tax deduction and you get to skip the closing costs, so it’s beneficial to all parties.
3. Ask your lender if you can include the closing costs in your loan. Yes, there will be a small charge for this but it won’t be nearly as large as the immediate outlay of cash necessary to pay closing costs.
Despite what many first-time homebuyers think, the down payment isn’t the whole ball of wax when it comes to cash outlays when you purchase a home. It’s important to determine exactly how much cash you’ll need to purchase a home so that you can budget for these expenses. Surprises are never good when it comes to money, right?!
My name is Lynda Hafner from ERA Key Realty. If you are considering buying a home In Worcester County and don’t already have a buyer agent contract, I would love the opportunity to allow my knowledge and experience to get you the best price on a new home. Call or text me at(508) 942-7923 or visit me on the web at www.lyndahafnerhomes.com