It’s important that borrowers understand the upfront costs of buying a home and the fees (known as “closing costs”) that go along with the purchase. In some cases, many home buyers only consider the down payment when they are saving for a house and are surprised by the additional upfront costs.
The actual amounts needed for both the down payment and closing costs can vary by a wide margin. It’s important that would-be buyers meet with their mortgage professional first to get an idea of what they might be.
If buyers understand their options and choose their mortgage wisely, they can minimize upfront costs when buying a home.
I’m linking to an article by Erik Marin at The Mortgage Reports – and he does a great job of going through what borrowers can expect in terms of closing costs. I highly recommend that you read the entire article here…
What are the upfront costs of buying a home?
There are several costs that borrowers must pay prior to the closing of a real estate transaction. Collectively, these are called “cash to close.”
Upfront home buying costs include:
- Earnest money – 1% of purchase price or more (paid first but goes toward your down payment)
- Down payment – This figure can be anywhere from 0% to 20% plus
- Closing costs – 2–4% of home loan amount
- Prepaid property taxes and home insurance – 6–12 months’ worth
It’s crucial that borrowers have a good idea of the upfront costs associated with buying a home so they can set their expectations realistically and have enough cash on hand to complete the transaction.
Earnest Money
This is also called a ‘good faith deposit’. Earnest money is a wire transfer or personal check paid to the seller and held by the escrow company shortly after your offer is accepted. This money tells the seller that you’re serious about purchasing the property.
Provided the deal goes through, your earnest money will be applied to your down payment at closing.
You can find out more about earnest money here…
Down Payment
Buyers must also make a down payment that counts toward the home purchase price. This payment is made at the close of escrow.
The amount of the down payment varies by loan type. VA and USDA loans can be done with $0 down payment.
FHA loans can be done with as little as 3.5%.
Conventional loans vary from 3% down to 20%+.
If you’re not sure how much down payment you need, talk to your mortgage lender about which types of mortgage loans you qualify for and how much cash is required for each one.
You can find out more regarding down payment options here…
Closing Costs
Your down payment is only one of the parts due at the close of escrow, as closing costs must also be considered. These cover all the fees required to set up your mortgage loan, including the lender’s fees, appraisal, inspection, and other third–party service fees.
Borrower’s can estimate paying 2–4% of your loan amount in closing costs.
A few of the major ones include:
- Mortgage application, origination, and underwriting fees
- Home inspection
- Home appraisal
- Discount points
- Mobile notary fees
- Title search and insurance
- Recording fees
Soon after you apply for your home loan, the lender will give you a document known as a Loan Estimate. This standardized, three-page document gives you a lot of important information about your new loan.
Page 1 includes your loan amount, mortgage rate, and estimated monthly payments, as well as an estimate of your total closing costs. Page 2 provides an itemized breakdown of the various costs associated with your loan.
You can find out more regarding the specifics on closing costs here…
Prepaid Taxes and Insurance
Prepaid taxes and insurance are usually lumped into closing costs. But it’s helpful to explain them separately so borrowers can better understand these costs and classify them as unique expenses.
At closing, borrowers are required to pay for a year’s worth of homeowners insurance coverage. Lenders will not lend on uninsured property, hence this requirement.
Prepaid taxes are also collected at the time of closing and are estimated from the date of closing to the next tax due date.
Note that you may not have to pay these costs upfront if you put at least 20% down and decide not to open an escrow account for your taxes and insurance.
Getting Started
Interestingly, all home buyers pay essentially the same set of upfront fees…although the actual cost is quite different from one buyer to the next!
The total upfront home buying costs depend on your loan type, location, mortgage lender, mortgage rate, and a number of other factors.
For this reason, reach out to me before you start looking for a home. I will be able to go through how much you can expect for your down payment and closing costs. It would be my pleasure to help you!
