What You Need To Budget for When Buying a Home

When it comes to buying a home, knowing how much you need to save and where to get that information might be frightening. However, you should be aware that you are not expected to have all of the answers. Many reputable pros can assist you in gaining a better understanding of your finances and what you'll need to budget for during the process.

Here are a few things experts recommend you plan for along the way to get you started.

1. Down Payment

Your down payment is likely already on your thoughts when you set your savings target for your purchase. And, like many others, you may believe that a down payment of 20% of the home's purchase price is required - but this isn't necessarily the case. According to the National Association of Realtors (NAR),

"One of the most common misunderstandings among homebuyers is what constitutes a standard down payment and how much is required to become a homeowner. It's crucial to have this knowledge in order to know what to save...

The good news is that in some cases, you may be able to put down as little as 3.5 percent (or even 0 percent). To fully comprehend your alternatives, work with a reputable specialist who can explain the various loan kinds, down payment help programs, and the requirements for each.

2. Deposit of Earnest Money

An earnest money deposit is something else you should think about. While it isn't essential, in today's extremely competitive market, it is frequent because it might help your offer stand out in a bidding war.

So, what exactly is it? When you make an offer on a house, you pay a deposit as a demonstration of good faith. This deposit functions similarly to a credit. You're utilizing some of the money you've previously set aside for your purchase to demonstrate to the seller that you're serious about buying their home. It's not an extra cost; it's just paying a portion of it up front. What it is and how it works is explained by First American:

"When placing an offer, the buyer pays a deposit to the seller. This deposit is usually held in trust by a third party and is used to demonstrate to the seller that you are serious about buying their house. The money will usually be allocated to your down payment or closing costs when you close."

To put it another way, an earnest money deposit may be the first check you make toward your purchase. The quantity fluctuates depending on the state and circumstance. According to Realtor.com,

"The amount you put down as earnest money will be determined by a variety of circumstances, including state regulations and limitations, the current market, what your real estate agent recommends, and what the seller requires." However, you should anticipate to pay 1% to 2% of the total property purchase price as a down payment."

Work with a real estate advisor to learn about any local restrictions and what other purchasers in your market have recommended. They'll assist you in determining whether or not it's a viable alternative for you.

3. Closing Expenses

The following item to consider is your closing costs. Closing costs are defined by the Federal Trade Commission (FTC) as follows:

"A loan origination fee, title examination and insurance, survey, attorney's fee, and prepaid items, such as escrow payments for taxes and insurance, are all upfront fees levied in connection with a mortgage loan transaction."

The expenses for numerous people and services involved in your transaction are essentially covered by your closing costs. The National Association of Realtors has this to say about how much to budget for:

"A house is more expensive than its purchase price. Closing expenses, for example, which account for between 2% to 5% of the home's purchase price, are a significant additional expense... Lenders must give a Closing Disclosure three working days prior to a mortgage closing. However, in order to avoid sticker shock days before closing, purchasers will need to account for these additional costs ahead of time."

The essential point is that smart buyers budget for these costs ahead of time so they can go into the process prepared. Freddie Mac puts it succinctly:

"If you're looking to buy a house, you're definitely thinking about your down payment. To be sure, it's the most expensive part of the process. It is, however, not the only cost, and it is vital that you understand all of your costs before getting started. The better prepared you are for your down payment, closing costs, and other costs, the easier it will be to buy a home."

Conclusion

It's critical to know what to budget for when buying a property. Let's connect so you have trusted information on what to expect when you buy a property and to ensure you understand these and any other fees that may arise.