Thursday, April 19, 2012

How much money do I need to buy a house?

If you're thinking of buying a house, you may have taken the first step which is to get prequalified for a mortgage; however, there are some other factors to consider ... like how much money/cash you may need upfront. From contract to close, there are a few numbers you should know about and be prepared for:

  • Down payment: ...the obvious! Depending on what type of loan you're pursuing, you may need a down payment anywhere from zero (yes, you read that right - think USDA loan), $100 (FHA loan on a HUD property), 3.5% of the purchase price (FHA loan) to 5-20+% of the purchase price for conventional products. This is due at closing but typically must be available in your account a few days/weeks prior to closing so that the lender can confirm that you have the cash needed to close. The good news is that some loan products (FHA) allow gift funds but check with your lender for the specific requirements on this.
  • Earnest Money:  In the local market, earnest money is typically anywhere from $500-$1000 for majority of properties but can be higher depending on the purchase price. Typically the rule of thumb is "the higher the purchase price, the higher the earnest money". This is totally negotiable and can vary greatly. What is earnest money? Earnest money is a deposit to show that you're serious about buying the house (if there was no such thing as earnest money and buyers didn't have any monetary interest, you can imagine that contracts would be broken all the time!). The good news is that earnest money is your money and it comes back to you at closing in the form of a credit towards your closing costs, down payment, or credit to the sales price so long as you follow the terms of the contract and close as scheduled. If you default or terminate after due diligence/inspection periods/contingency periods, etc, then you risk losing your earnest money. In some unique situations, it can be negotiated that earnest money is non-refundable or is paid to the seller - be sure you understand your contract! Prepare to write an earnest money check when you write the offer, although sometimes it can be negotiated to be paid upon a binding agreement or within so many days of the binding agreement date.
  • Closing Costs & Prepaids: If you're obtaining financing for the purchase of a property, you will incur several fees/costs/etc. that are collectively known as "closing costs" and "prepaids." These fees include things such as the lender's origination fee, attorney's fees, credit report fees, initial deposits into escrow to cover hazard insurance and taxes, etc. In the current market, it is typical that the seller contribute towards buyer's closing costs; however, this contribution doesn't always cover 100% of the costs. It just depends on how the deal is negotiated. When shopping for a mortgage, be sure that the lender provides an estimate of how much cash is needed to close. This should include your down payment, closing costs, and prepaids. Some lenders try to sneak by by just telling the client about the down payment amount and never mentioning the closing costs amount upfront. Be sure you know how much you will need to close the deal so that you can prepare ahead of time!
  • Home Inspection: While a home inspection is optional, it is HIGHLY (notice the capitalization, bold, italics, underline ... you get how we feel about this, right?) recommended. Home inspections in this area typically run anywhere from $250-450 depending on the size of the house and what all the inspection includes. Some inspectors can also do termite, radon, mold inspections, etc. Either way, you'll want to budget for this ahead of time. You'll need to pay for the home inspection at the time of the service - just depends on when you have your home inspection, but be sure to do it during your inspection/due diligence period.
  • Appraisal: Majority of lenders these days collect this fee upon contracting on a property while others may collect it at closing as part of the closing costs. Go ahead and budget for this as an upfront fee. Typically it's around $400-500 in this area.
These are the main items that you will need money for; however, there are always optional items like home warranties. Many first time home buyers have limitied cash reserves and don't know exactly what to expect when it comes to purchasing a home. You may be prequalified to purchase a home, but be sure that you have the funds to move forward if you're considering making an offer!, to cover our rear ends, please know that the information above is specific to our location (perhaps in many areas, earnest money needed is much more!). Every situation is different and should be discussed with the Realtor or lender that you are working with. Some of this information is subject to change ... like the $100 down payment that HUD offers buyers pursuing an FHA loan - this is a current promotion that could end at anytime. Questions? please call or email us!

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