You saved money for a down payment and you can’t wait to buy a home. Before you start looking, though, did you save money for closing costs?
It’s an unfortunate fact that many first-time homebuyers overlook the closing costs. It’s not a small figure, though. Expect to pay between 2% and 5% of the loan amount in closing costs. That means thousands of dollars that you need on top of the down payment.
Keep reading to find out what you should budget for when buying a home.
You Need Earnest Money Right Away
Earnest money is money you put down for the seller when you sign the contract. It shows your good faith in buying the home. A third-party escrow agent holds the funds. They remain there until you close on the home or someone cancels the sale.
The earnest money can come right from your down payment money. If you close on the loan, the escrow agent releases the funds. You can use them towards the down payment then. It’s not additional money you need, but it’s money you need right away when signing a contract.
If you don’t close on the loan, the escrow agent (or a court) will decide who gets the funds. If you violated the terms of the contract, the seller may keep the money. If you canceled the contract within the contingences provided, though, you may get the money back.
Set Money Aside for Real Estate Taxes
No matter where you buy a home, you must pay real estate taxes. The amount will vary, though. Before you look for a home, ask about the average cost of real estate taxes in the areas you may look. Next, ask for the due dates. This will determine how much you need at the closing.
If you set up an escrow account, the lender must make sure you have enough money in the account to cover the taxes on the due date. If you close near the tax due date, you’ll need more money upfront to fund the account.
Pay for Homeowners Insurance
Every lender requires a 1-year paid receipt for your homeowners insurance. You can get a basic idea of the cost by calling around and asking the average cost of homeowners insurance in the area. Expect to pay between $700 – $1,200 depending on the size of the home, type of coverage, and your location, though.
You will need to pay the full year upfront. Lenders can’t clear the loan to close without proof of the insurance.
Pay the Closing Costs
Here’s where the biggest expenses come in, besides the down payment. Closing costs include all lender, attorney, appraiser, title, and government fees. A few of the most common fees include:
- Origination fees
- Discount fees
- Credit report fees
- Processing or underwriting fees
- Recording fees
- Appraisal fees
- Title search fees
- Title insurance fees
- Closing fees
- Attorney fees
- Survey fees
Again, these fees may cost as much as 2% to 5% of the loan amount. If you borrow $250,000, you may pay up to $12,500. Again, this is in addition to your down payment.
Setting up the Home
Now, once you close on the loan and are in it, you still have to spend money. Yes, the house is yours and hopefully ready to move into, but you need electric, gas, and water. You may also need cable and internet.
What about appliances and furniture – do you have any? If you don’t have any, add those expenses to your list. The utility fees are obviously a necessity; you can shop around for the furniture and appliances or even do without a few for the time being if money is tight.
Getting Help With the Fees
When it’s all said and done, you are looking at thousands of dollars on top of your down payment. What if you can’t afford it? Are you out of luck?
Fortunately, there’s help available. Many loan programs offer down payment assistance. They each have different qualifying requirements, but are worth considering. If you don’t qualify, you may also receive gift funds.
Gift funds are from a relative, employer, or charitable organization. Lenders allow gift funds as long as you can prove they are not a loan. Lenders require a gift letter from the donor that states:
- The amount of the gift
- The reason for the gift (to purchase a home)
- The address of the property
- That the money isn’t a loan
You may also get help from the seller, but not for the down payment. Sellers may only help with the closing costs. Lenders call it seller concessions. Sellers can credit you up to the amount of the closing fees as long as it fits within the parameters of the loan program’s requirements. Each loan program has different amounts of allowed seller concessions.
Buying a home means coming up with a lot more than the down payment at the closing. Preparing ahead of time for the extra costs can make the process smoother. If you need assistance, consult with your loan officer to figure out what options are available to you.