How much money is required to buy a home?

I get asked frequently how much money is needed to buy a home. When I sit down with first-time home buyers this is one of the first topics we discuss.

There are four elements in a purchase that involve money. They are:

Down payment
Earnest Money
Closing Costs
Pre-paid items

Let’s talk about each one.

Down Payment: Is the amount of money that you invest into the purchase. These funds lower the loan amount and create a equity position for you in the property. The higher the down payment the better the interest rate.

Types of Loans:

There are “no-money down” loan programs. They essentially provide you a second mortgage the covers the required FHA down payment of 3.5%. This second mortgage is at a slightly higher interest rate than the first mortgage, but it only allows up to 6% of the purchase price. So, the idea of no-money down just means that you don’t have to bring it out of pocket. You finance the amount.

FHA offers a 3-1/2% down loan. It is typically used by a first time home buyer who has saved a little money.

Conventional Loans range from 3% on up. The typical down payment for these loans are 3%, 5%, 10%, 15% and 20%. You can add as much of your own funds as you want. Each contribution bracket provides you with a better interest rate.

Earnest Money:

Is a portion of the down payment funds that is provided upfront in the transaction. After your offer is accepted, according to Utah State Law you have 4 calendar days to deliver your earnest money to either your agent’s brokerage or a title company specified. This amount is negotiable. The higher the amount used the more stable the seller will see your offer. The typical amount I am seeing is approximately 1% of the purchase price. These funds get credited towards your down payment at the closing. So, for example, if you are putting 5% down and use 1% towards earnest money then you would only bring in the additional 4% at closing for the total down payment due.

If you are getting a no-money down loan, you will still need to have funds available for earnest money. It is the money the holds the seller together in a contract with you. You can choose to have your earnest money refunded to you at the closing or use it towards some of your other closing costs.

Closing Costs:

“Closing costs” is a term used to lump together those fees associated with the title and lending process. Typically they range from 2% to 5% of the purchase price. They include title insurance, origination fees, underwriting fees, document preparation and any home owner’s association fees etc. The average cost is approximately 3.5% for a $300,000 property. These costs can be negotiated to be paid by the seller, add them to a second mortgage or include them in your interest rate if you don’t have the fund to bring these funds to closing.

Inspection Costs:

There are costs in a purchase that even if you decided not to buy the home you may be required to pay. They are costs associated with inspections and testing for things like radon, meth, lead based paint, asbestos etc. and the other item that costs upfront is an appraisal. Once you have someone do these jobs they get paid for their work. You pay for these things upfront at the time of service. I typically see clients spend approximately $1000 for both inspections and appraisal fees.

So, what is the minimum a buyer needs to purchase a home? If you are a first-time home buyer, there are many options available to you. You could feasibly get into a home for as little as $2000 out of pocket! If you are interested in buying a home, let’s get talking.