Knowing what to budget for when buying a home may feel intimidating — but it doesn’t have to be. You can take control of the process by understanding the costs you may encounter upfront.
Here are a few things experts say you should consider as you plan ahead.
1. Down Payment
Saving for your down payment is likely at the top of your mind. But how much do you need? A common misconception is that you must put down 20% of the purchase price. But that’s not necessarily the case. You don't have to unless your loan type or lender specifies it. Some home loan options require as little as 3.5% or even 0% down. An article from The Mortgage Reports explains:
"The amount you need to put down will depend on a variety of factors, including the loan type and your financial goals. If you don’t have a large down payment saved up, don’t worry—there are plenty of options available . . ."
A trusted lender will go over the various loan types with you, any down payment requirements on those, and down payment assistance programs you may qualify for. The more you know ahead of time, the easier the process will be. The key to getting the needed information is working with a pro to see what’ll work best for your situation.
2. Closing Costs
Ensure you also budget for closing costs and the collection of fees and payments made to the parties involved in your transaction. Bankrate explains:
“Mortgage closing costs are the fees associated with buying a home that you must pay on closing day. Closing costs typically range from 2 to 5 percent of the total loan amount, and they include fees for the appraisal, title insurance and origination and underwriting of the loan.”
A trusted lender can guide you through specifics and answer any questions regarding closing costs. They can also give you a better idea of how much you should be prepared to pay so you can confidently cruise through your closing.
As you plan for closing day, be sure to budget for your real estate agent's professional service fee, too, in case the seller doesn't cover it. But don’t worry; you’ll work with your agent to agree on this so that you won't be surprised at the finish line.
3. Earnest Money Deposit
And if you want to cover all your bases, you can also consider saving for an earnest money deposit (EMD). According to Realtor.com, an EMD is typically between 1% and 2% of the total home price and is money you pay as a show of good faith when you make an offer on the house.
But it’s not an added expense. Instead, it works like a credit and covers some upfront costs. You’re simply using some of the money you’ve already saved for your purchase to show the seller you’re committed and serious about buying their house. Realtor.com describes how it works as part of your sale:
“It tells the real estate seller you’re in earnest as a buyer . . . Assuming that all goes well and the buyer’s good-faith offer is accepted by the seller, the earnest money funds go toward the down payment and closing costs. In effect, earnest money is just paying more of the down payment and closing costs upfront.”
Remember, this isn’t required and doesn’t guarantee your offer will be accepted. Working with a real estate advisor is vital to understanding what’s best for your situation and any specific requirements in your local area. They’ll advise you on what moves you should make so you can make the best possible decisions throughout the buying process.
Bottom Line
What is the key to a successful homebuying savings strategy? Being informed about what you need to save for. Because when you understand what to expect, you can plan. With an expert agent and a trusted lender, you’ll have the information you need to move forward confidently.
