The New Norm When It Comes to Budgeting for Your Home Purchase – 4/5/22

Buying A Home

What You Need To Budget for When Buying a Home | MyKCM

When it comes to buying a home, it can feel a bit intimidating to know how much you need to save and where to find that information.

To get you started, here are a few things experts say you should plan for before looking at homes.

1. Down Payment

As you set your savings goal for your purchase, your down payment is likely already top of mind. And, like many other people, you may believe you need to set aside 20% of the home’s purchase price for that down payment – but that’s not always the case. The National Association of Realtors (NAR) says:

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 . . .”

The good news is, you may be able to put as little as 3.5% (or even 0%) down in some situations. To understand your options, partner with a trusted professional who can go over the various loan types, down payment assistance programs, and what each one requires.

2. Earnest Money Deposit

Another item you must plan for is an earnest money deposit. While it isn’t technically required, it’s expected in today’s highly competitive market because it can help your offer stand out in a bidding war. In other words, offers that don’t promise earnest money have a low to zero chance of being considered.

So, what is it? It’s money you pay as a show of good faith when you make an offer on a house. This deposit works like a credit. You’re using some of the money you already saved for your purchase to show the seller you’re committed and serious about their house. It’s not an added expense, it’s just paying some of that up front. 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.”

In other words, an earnest money deposit could be the very first check you’ll write toward your purchase. The amount varies by state and situation. Realtor.com elaborates:

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.”

3. Closing Costs

The next thing to plan for is your closing costs. In today’s market, buyers should expect to cover 100% of closing costs on their own. The Federal Trade Commission (FTC) defines closing costs as:

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.”

Basically, your closing costs cover the fees for various people and services involved in your transaction. NAR has this to say about how much to budget for:

“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.”

4. Cash for an Appraisal Gap

What’s the secret weapon that homebuyers are using to win bidding wars? It’s not the purchase price…it’s offering to put money towards a potential appraisal gap.

An “appraisal gap” is the difference between the appraised value of a home and the purchase price in the sales contract. This tactic is used in a sales contract to guarantee that the home buyer will cover some or all of the monetary gap between the appraisal and the sales contract (if an appraisal gap becomes an issue). This amount can be a $1,000 or $10,000 or beyond….it’s up to the discretion of the buyer in terms of what amount to offer.

The key takeaway is savvy buyers plan ahead for these expenses so they can come into the process prepared. Freddie Mac sums it up like this:

“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.”

Bottom Line

Knowing what to budget for in the homebuying process is essential. To make sure you understand these and any other expenses that may come up, let’s connect so you have reliable expertise on what to expect when you buy a home.

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Hi, I'm Ansley. I'm a native of Savannah and a real estate agent who loves helping people move to the Greater Savannah Area. My passion for connecting newcomers to our community is at the cornerstone of everything that I do. Let me show you around my hometown...you'll wonder what took you so long to get here!

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SEARCH WITH A LOCAL

Hi, I'm Ansley. I'm a native of Savannah and a real estate agent who loves helping people move to the Greater Savannah Area. My passion for connecting newcomers to our community is at the cornerstone of everything that I do. Let me show you around my hometown...you'll wonder what took you so long to get here!

schedule your free consultation

Buy

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Sell

All Articles

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