Buying a home is the ultimate dream for many. It’s a good investment and comes with several perks that make it worth your while.
Still, buying a house is not easy, especially if you haven’t pinched your pennies. When buying a home, you need a cash reserve for all of the requirements, some of which might catch you by surprise.
How much cash does it take to buy a home?
When you’re scrolling through the web and looking at houses, you’ll likely find prices. Though that’s a good indicator of the price of the house and the cash you’ll need, it’s not the actual cost that you’ll wind up paying.
Plus, buying a home is not like other purchases, and you’ll need money down to start the buying process. Below, we’ll share all the costs, helping you understand how much cash it really takes to buy a home.
The down payment
The first thing that you’ll have to have is a down payment. When buying a home, even if you have perfect credit, you’ll need some money down, making it a requirement in the home buying process.
The amount that you need to put down depends on the final purchase price. Normally, those that are selling will give you a percentage and you’ll have to pay that down.
- So, an easier way to put it is with actual numbers. Let’s say you find a house that interests you that’s $200,000.
- If you have to pay 10% down, you’re looking at a down payment of $20,000. So, once you find out the final cost and the percentage you’re required to pay, you’ll have a better idea of what you need to pay.
Typical down payment rates
In most cases, lenders want you to pay a least 20% down. However, for the average first-time homebuyer, coming up with 20% to pay down is not so simple.
Some mortgage companies have special mortgage products to help lower down payment percentages to 10% or 5%.
Where to get down payment funds
Your downpayment is money saved. No respectable mortgage company will allow you to take out a loan for your down payment.
There are also some restrictions when it comes to paying with cash only. Most banks require that your down payment is traceable through a financial institution.
The closing costs
If you’ve ever talked to someone buying a home, one of the most frustrating parts is the closing costs. These costs come trickling in and make the final cost of the house much more than expected.
On average, expect to pay about 2-3% of the final selling price toward closing costs. Some closing costs that you’re likely to see on your bill include:
Application fee
This one is subject to the lender you’re working with. While some waive this fee, others make sure that they charge it. Typical amounts range from $300 to $500.
Appraisal fee
Before everything is finalized, someone has to come to your home and take a look at your home. They check for key things that drive the value up or down, coming out with a final estimate of the worth of your home. This too comes with a price tag of around $300 to $500.
Paying for the title
The title of a house is a document that is necessary for the legal purchase. When lenders and homebuyers look at titles, they can see whether or not there are any issues with the house and make sure that it is clear from liens. This will cost you around $250.
Insurance for the title
Title insurance is not like most insurance and is something that you will need when the results for the title come back.
If there is a lien on the title that pops up during the search, the insurance will guarantee that all of your funds are safe and that your name is not associated with any mishaps with the title.
Attorney
This is not the case in all places but, in some places, you’re required to have an attorney. Your attorney will handle everything and get all of the titles and paperwork in proper and legal order. However, it comes with a pretty high cost, one that could be over $1,000.
Inspection
This is another optional cost but, one that almost every home agency recommends. An inspection is used as a way to look through the home and check for any serious damages to the most important parts.
An expert will come along and check things you might not think about including plumbing, walls, and insulation, giving you a good estimate of what repairs might cost.
Transfer taxes
Again, this one depends on your location. Many states require this tax. You’ll have to pay a fee for the amount transferred from one property to mortgage another, which could come out costly depending on the percentage.
How to reduce closing costs
A lot of first-time homebuyers don’t know this but, you can negotiate closing costs. When you’re worried about the bottom dollar, try and see if you can talk the buyer into covering the closing costs. It will depend on the market, but it is worthwhile to ask.
Prepaid expenses
Purchasing a home can be confusing. One of the most confusing areas is the funds in escrow.
To pay taxes each month, they may need you to pay an up-front fee at closing. The amount could be a total of all monthly fees from 2 to 12 months in total.
Apart from taxes, lenders do the same when it comes to insurance. They can ask for a total of up to 2% of the entire loan amount, which adds to the final cost of buying a home.
This is also something that you can get the seller to pay, as long as you’re firm with your negotiations and stick to your initial offer.
The utilities and HOA costs
Because there are all kinds of appliances in the home, you’ll have to watch out for utility charges. These charges are only applicable if the homeowner happened to pay for utilities before moving out.
If that’s the case, you’ll have to pay them back for what they paid for. Luckily, these costs don’t usually go over a few hundred dollars.
One expense that some homebuyers don’t see coming that could add up is the cost of membership fees in homeowner associations.
Moving into a home where neighbors pay fees, you may be subject to reimbursing the previous owner or paying the fee to join upfront.
Cash reserves
Lenders know that buying a house is a big responsibility and they take it very seriously. One of the things that they require buyers to have is some kind of cash reserve.
This amount you have in your account is supposed to be used as a way to show that you’ll have enough to at least pay your first month and that you’re not wiping out your account for buying costs.
Lenders differ in the amount that they require. Typically, it’s about two months of payments toward your home.
If your payments are about $700 a month, you’ll have to pay $1,400 upfront. Funds have to be in some kind of account, whether it’s checking, savings, or even a money market fund.
The art of negotiation
Working with a realtor, you have a better chance at negotiating if you’ve never done it before. Your realtor is likely experienced in negotiating and will fight along your side to get the sale.
When negotiating, it’s good to learn the art of negotiations, making sure that you ask the seller for:
- An overall lower final price
- To take care of closing costs
- To waive utility fees
- To pay inspections out of pocket
In some cases, buyers will give in and take care of some, especially if you are their only interest. Play your cards right, stay firm, and let them make the first move.
Buying a home will cost you
Buying a home is a great investment. It has an almost guaranteed return value and is likely to help you earn money at the end of the day.
Still, it comes with a ton of costs, some of which will wind up costing you much more than you bargained for.
Going back to our initial example, if the house you’re looking into costs $200,000, you’re looking at:
- A $20,000 down payment (at 10%)
- About $5,000 in closing costs
- Close to $4,000 in Prepaid Expenses
- $500 for utilities
- About $,2400 in cash reserves
When all is said and done with this example, you’re looking at around $31,900 total to purchase a home.
Purchasing a home takes planning, saving, and making sure you can pay the mortgage every month. Remember to exercise your negotiating skills and look for cuts in cost where you can.
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