Home Buying Budget
With what seems like everyone buying a home nowadays, many first-time buyers are wondering what they need to budget for. Buying a home can feel a bit intimidating, especially in this market, but knowing what you need can make the process easier. For those who are wondering what you need to buy a house, you are not alone. There are many people along the process of buying a home who can help you determine what you need to budget for and how much you need. Here are some key parts to factor into your home buying budget.
As most people know, a down payment is one of the biggest hurdles to buying a house. The down payment is likely already on the top of your mind when buying a home. A common myth in a home buying budget is that buyers will need a down payment of at least 20%. However, this is hardly the case in today’s market, with some loans offering a 0% down payment as well. According to the National Association of Realtors (NAR),
“One of the biggest misconceptions among housing consumers is what the typical down payment is and what amount is needed to enter homeownership. Having this knowledge is critical to know what to save . . .”
For those who are intimidated by having to save 20% of your purchase price for the down payment, this is good news. For most first-time home buyers, your down payment will be as little as 3.5%, or even 0% with certain loans. There are many options available in different markets, so make sure to reach out to a lending professional to learn about programs.
Earnest Money Deposit
This is considered your “I am a serious buyer” deposit. Essentially, the earnest money deposit is a good faith check to show you are serious about your purchase. While this is not always required, it is beneficial to have in this market, as it allows sellers to know you are serious. This deposit is essentially a kind of credit that you use. You are showing that you are willing to put your money where your mouth is, and that allows sellers to take you serious. The best part about this deposit is that you actually get it back at closing, making it like a line of credit. First American explains what it is and how it works:
“The deposit made from the buyer to the seller when submitting an offer. This deposit is typically held in trust by a third party and is intended to show the seller you are serious about purchasing their home. Upon closing the money will generally be applied to your down payment or closing costs.”
Realtor.com allows more insight into how much to budget for:
“The amount you’ll deposit as earnest money will depend on factors such as policies and limitations in your state, the current market, what your real estate agent recommends, and what the seller requires. On average, however, you can expect to hand over 1% to 2% of the total home purchase price.”
Closing Costs For Home Buying Budgets
“The upfront fees charged in connection with a mortgage loan transaction. …generally including, but not limited to a loan origination fee, title examination and insurance, survey, attorney’s fee, and prepaid items, such as escrow deposits for taxes and insurance.”
Essentially, closing costs cover the fees for various people and their services that were involved in your real estate transaction. NAR says this about how much to budget for closing costs:
“A home costs more than just the sale price. For example, closing costs—which make up about 2% to 5% of the home’s purchase price—are a major added expense…Lenders provide a Closing Disclosure at least three business days prior to closing on a mortgage. But buyers will need to budget for these added costs ahead of time to avoid sticker shock days before closing.”
The biggest aspect to take from this is that savvy buyers need to plan for these expenses up front, so they do not come up short at the end. Freddie Mac sums it up:
“If you’re in the market to buy a home, your down payment is probably top of mind. And rightly so – it’s likely the biggest cost of homebuying. However, it is not the only cost and it’s critical you understand all your expenses before diving in. The more prepared you are for your down payment, closing and other costs, the smoother your homebuying journey will be.”