Home Buyers: How Much Money is Really Needed to Purchase a Home?

When it comes to purchasing a home, the overall process and hefty outflow of cash can be stressful to even the most experienced home buyers. For the novice or first-time home buyer, it may be difficult to understand exactly how much is needed to purchase real property. Although it is possible to obtain assistance with some of these costs, it is best to get an understanding of the real costs to owning a home so buyers can shop for the best deal, negotiate contracts, or save their own money appropriately.

Down payment. Depending on the type of loan the buyer obtains, the down payment could range from 3.5% of the purchase price of the home to 30% of the price of the home. The higher down payments are usually reserved for investors, those with less than stellar credit, and other high-risk consumers.

Closing costs. Closing costs are various fees charged by those involved with the home sale transaction, such as the lender for processing the loan, the appraiser, the title company for insuring the property title, a surveyor, any home inspectors, local government offices for recording the deed, the real estate attorney for closing the transaction, etc. Generally speaking, closing costs can range from 1% to 8% of the price of the home, but are typically 2% to 3% of the price of the home. The amount largely depends on the points and origination fees the lender charges to make the loan.

Prepaid expenses and reserves. Most lenders require some items to be prepaid at closing in order to pay the amounts when due. The funds collected at closing are usually held in an escrow account to be disbursed at a later time. These prepaid expenses are included on the closing statement along with the closing costs. Items that are typically prepaid and/or have required reserves are property insurance, property taxes, mortgage insurance, and mortgage interest. The amount of these items varies, depending on the area in which the buyer lives and the type of loan and insurance the buyer has.

Home repairs. Home buyers typically do not consider repairs as part of the cost to buy a home. As part of the real estate sales contract, repairs to a home can be negotiated to be paid by the seller. However, the seller may not make all the repairs desired by the buyer (for example, in situations where a home with multiple offers needs minor repairs or a home for sale by a bank is sold as-is). These repair costs will vary in amount, but need to be factored in to the home purchase budget.

By effectively shopping around for the best deal, negotiating the contract, and saving money, home buyers will be able to be better prepared for the financial obligations of owning a home.