How Much Money Do You Need to Buy Your First Home?
This is a question I’m asked, usually pretty early in the process, when someone is just beginning to think about buying real estate.
My answer is always the same:
And this is why.
There are three areas, for lack of a better phrase, where you’ll need funds to complete your purchase.
The first one that comes to mind for most people is the down payment. And, also for most people, this is the only money they initially plan for. While it’s usually the largest piece of the money pie, it’s by no means the only funds you’ll need to have available.
In a standard transaction, a buyer would need money for:
1. Down payment
2. Closing Costs, prepaid expenses
3. Upfront costs such as Inspections, credit reports and appraisal fees.
And in each one of these areas, those numbers will vary based on myriad factors. Let’s look at them individually.
This amount is usually a percentage of the purchase price.
Conventional Financing: You’ll need a mimimum of 3%, most lenders work with programs requiring 5% and usually this money must be your own. The 3% programs will allow gift funds but the 5% programs do not.
FHA Financing: You’ll need to have 3.5% of the purchase price and this money can be in the form of a full or partial gift. You do not need to have your own funds to purchase. There are requirements for gift funds though, so you’ll want to explore that and make sure the gifter has a complete understand of what will be required of them.
VA Financing: Veterans have the ability to purchase with a zero-downpayment program. Any funds paid at closing towards the downpayment will pay the loan amount down, but it is not a requirement.
The closing costs associated with your loan will vary (see, still depends!) on many factors.
1. The type of loan you’re getting. VA closing costs are different because the Veteran is not allowed to pay for the Escrow fee. Mortgage insurance for FHA and less than 20% downpayment conventional loans will all influence the amount of closing costs needed.
2. The amount of your downpayment
3. Your Closing Date:
4. Whether there is a Home Owners Association
5. How much your Insurance Premium will be
6. How much are the property taxes?
7. The interest rate on your loan
And the biggest variable of all for your closing costs is whether the seller is willing to pay any of those for you. Yep! The seller can pay these fees if you’re able to negotiate this at some point in the sale. So, your closing costs could be thousands and thousands of dollars, or they could be ZERO
So once you have an idea of what you’re going to need for your downpayment and closing costs, you also need to keep in mind you’ll need funds for any inspections you’re going to have once you’re in contract. In my market, these range from $350 to $500 for condo or “average” single family home pest and structural inspection. If there any additional inspections you want to have, such as mold or lead paint, surveys, or any fees that might be incurred during the “due diligence” time period, you’ll need to pay for those up front.
Depending on the lender you’ll be working with, you may also be required to pay for your appraisal at the time it’s ordered rather than at closing. This fee also ranges but will likely be somewhere between $400 and $600.
And while this is the money you’ll need in order to get into your home, don’t forget you’re going to want to decorate and furnish it eventually….so plan for that too!
There are always exceptions to the financing particulars for every individual purchase. So whether you’re a first time or 10th time home buyer, you’re going to want to consult with a mortgage professional who can evaluate your financing on your individual set of circumstances.
But hopefully this gives you a ballpark idea of what might be required.
If you have any other questions or would like to talk more about the next steps, give me a call or text me at 206 (four nine one) 3819.
And if you’re interested in just seeing what might be available for sale right now in your area, you can do that here.