What fees do you pay upfront when buying a home?
Many homebuyers only think about the down payment when saving for a home. But you’ll also pay a list of upfront costs (called “closing costs”) when you buy.
The actual amounts needed for both down payment and closing costs can vary significantly. The good news is that you have a lot of control over what you pay.
If you understand your options and choose your mortgage wisely, you can seriously reduce your upfront costs when buying a home.
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What are the initial costs of buying a house?
There are several costs you must pay upfront and out of pocket to buy a home. Collectively, these add up to your “liquidity to close”.
The initial costs of buying a house include:
- serious money — 1% of the purchase price or more
- Deposit — Varies (average is 6-12%)
- Closing costs — 2 to 5% of the amount of the mortgage
- Prepaid property taxes and home insurance — 6 to 12 months
It’s essential to be aware of the upfront costs associated with buying a home so that you can set your expectations realistically and have enough cash on hand when you find the property you want.
“Knowing what to expect upfront can help a buyer be better prepared,” says Jason Geliosa real estate agent in southeast Michigan.
Dan Belcherfounder and CEO of Mortgage Relief, agrees.
“The external price of a listed home is not the final payment for a home closing transaction. Technically, other fees are involved. Potential buyers should carefully consider these factors to avoid confusion,” Belcher says.
Let’s look at each item – and what you can expect to pay – a little further.
1. Serious Money
Also known as a “good faith deposit”, a deposit usually takes the form of a personal check that is paid to the seller shortly after your offer is accepted. This money demonstrates to the seller that you are serious about buying the property.
Note that the seller does not keep the deposit for himself. If the transaction is concluded, your deposit will be applied to your deposit at closing.
When you make a good faith deposit, your check will be held by a third party, title company, or buyer’s agent and may not be cashed. If so, the funds are held in an escrow account and shown as a credit to the buyer at the closing table.
Deposits must be paid within three days of accepting your offer, so make sure you have cash on hand when house hunting.
“The deposit is generally paid in two instalments. The first installment is usually smaller and can be returned to you if you find anything unexpected during the home inspection and decide not to go ahead with your offer,” explains Guadalupe Sanchezfounder of Budgeting in Blue in Chicago.
He continues: “The second installment is the larger of the two and is usually made before your closing day. Your deposit is counted in your deposit and your closing costs.
“These funds are generally required to be disbursed within three days of mutual acceptance of your offer, so you must have these funds on hand and be ready to spend,” explains paige shultereal estate agent with Windermere Professional Partners in Gig Harbor, Washington.
The deposit is usually 1% of your offer price, unless you need to be more competitive with your offer, in which case it can be up to 10% of your offer price.
If you want to buy a house for $300,000, for example, your down payment will probably cost at least $3,000.
You will also have to pay a deposit which will count towards the purchase price of the house.
Many buyers think they need a 20% down payment, but in fact the average is much lower. First-time home buyers only pay an average 6% down payment and repeat buyers an average 12% down payment
Low down payment loans are also available. An FHA loan can be obtained for as little as 3.5% if you qualify; some conventional loans only require a minimum down payment of 3%; and no down payment is required for a USDA loan or VA loan.
If you’re not sure how much down payment you need, talk to a lender about the types of mortgages you qualify for and the amount of money required for each.
Keep in mind that the higher your deposit, the more your offer will be accepted by the seller.
On a $300,000 home, expect your down payment to range from $9,000 to $60,000 depending on the type of loan you choose.
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3. Closing costs
Your down payment is not the only amount you will have to pay on closing day. There are also initial closing costs. These cover all the fees required to set up your mortgage, including lender fees, appraisal, inspection and other third party service fees. Count on paying 2 to 5% of your loan amount in closing costs.
You can see a full list of closing costs here. A few of the main ones include:
- Mortgage application, origination and underwriting fees
- Commission fees for your agent or broker
- home inspection
- Home evaluation
- Title search, insurance and investigation
- Property registration and transfer taxes
- Lawyer’s fees
Using the example of buying a $300,000 home, you will likely pay between $6,000 and $15,000 in closing costs.
4. Prepaid taxes and insurance
“At closing, you’ll probably also have to pay a year of home insurance coverage and most likely at least six months of property taxes,” adds Sanchez.
Today, the average annual home insurance premium is about $1,250. And most American owners pay about $2,500 per year in property taxes, on average. That’s about $2,500 you’ll need to save for 12 months of home insurance and six months of property taxes. (However, this can vary greatly depending on location, home price, etc. So be sure to get an accurate estimate from your lender.)
“Prepaid taxes are collected at the time of closing and are estimated from the closing date until the next tax due date,” Gelios notes. “The first year of home insurance is collected at closing, with many lenders sequestering this cost to reduce the risk of borrowers letting it expire.”
Note that you may not have to pay these fees upfront if you put at least 20% down and decide not to open an escrow account for your taxes and insurance. But you will then be responsible for paying them yourself rather than letting your mortgage lender take care of the arrangements.
Technically, prepaid taxes and insurance are usually lumped into closing costs. But it helps to explain them separately to better understand these costs and compartmentalize them as one-time expenses.
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How much money do you need to save to buy a house?
Many homebuyers can get into a home with as little as 3-5% down payment. And closing costs are typically 2-5% of the mortgage balance. This means that to build a proper savings cushion, homebuyers need to save at least 10% of their purchase price. at least. And only if they know they will qualify for a low down payment loan.
“For [a] homebuyer who does not qualify for special mortgage options, they should expect to save approximately 25% of their target purchase price,” recommends Martin Orefice, Founder and CEO of Rent To Own Labs.
“So if you’re looking at homes in the $300,000 range, you should plan to save at least $75,000, which gives you some flexibility and cushion by the time you hit the close.”
Using the previous example of buying a $300,000 house, you will likely need to save the following to pay for the initial costs of buying a house:
|Initial cost||Low estimate||High estimate|
|Total initial cost||$15,000||$75,000|
* The deposit will be credited to your other expenses at closing, so this cost is not counted separately in the total
Obviously, cash-to-close can vary greatly depending on your down payment amount and closing costs.
Part of that is up to you. For example, you can choose how much you want to invest, with options ranging from 3% to 20% on a conforming loan. And you can shop around with different lenders to find the cheapest closing costs.
But some factors that affect the cost of buying your home, such as location, property tax rates and service charges, are beyond your control.
So be sure to get accurate estimates of your upfront costs and plan accordingly. Get pre-approved by a lender before you start looking for a home so you have a clear idea of your down payment options, closing costs, and how much money you’ll need to save to afford the home. house you want.
Help with down payment and closing costs
Here’s some good news: there are down payment and closing cost assistance programs you may be eligible for that can reduce the initial costs of buying a home.
“Each state has its own down payment assistance programs to facilitate the dream of home ownership. In my state of Michigan, for example, we have MSHDA, a program that provides down payment assistance in certain zip codes. It’s best to check with your agent and lender for information on all of your available programs,” recommends Gelios.
Check out these links for helpful resources on assistance program installments and closing costs:
Start buying your home
Although all homebuyers pay virtually the same set of upfront costs, the actual dollar value will vary significantly from buyer to buyer.
Your total upfront home buying costs depend on your loan type, location, mortgage lender, mortgage rate, and a number of other factors.
For this reason, you should get a firm estimate from a mortgage lender before shopping for a home. Your mortgage lender will tell you exactly how much you need for your down payment and closing costs. And it will allow you to set a savings goal and shop around for a home in your price range.
Ready to start?
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