Purchasing a home is a huge financial investment, and it's one that you'll likely be paying off for years to come. That's why it's so important to create a budget and stick to it when you're looking to buy a house. This blog post will discuss some basics of budgeting for a home purchase. We'll cover down payments, closing costs, and earnest money deposits.
One of the most important aspects of budgeting for a home purchase is saving up for a down payment. A down payment is the upfront payment you make when buying a house.
Saving up for a down payment is probably one of your top priorities if you're looking to buy a house.Many people believe that they need to save 20% of the purchase price when buying a home. However, this is not always the case. According to the Mortgage Reports, that's not always accurate:
“The idea that you have to put 20% down on the house is a myth. . . . The right amount depends on your current savings and your home buying goals.”
Most lenders require a minimum down payment of 5% on the home's purchase price. If you can afford it, consider putting down more than the minimum. By paying a 20% down payment, you won't have to spend extra on private mortgage insurance (PMI). PMI is an insurance policy that protects the lender if you can't repay your loan.
Another important aspect of budgeting for a home purchase is closing costs. Closing costs are fees charged by lenders and third parties in connection with the purchase of a property. These fees can add up quickly, so it's important to be aware of them before you start shopping for homes. Some typical closing costs include an appraisal, title insurance, and loan origination fees. According to Bankrate:
“Closing costs are the fees you pay when finalizing a real estate transaction, whether you’re refinancing a mortgage or buying a new home. These costs can amount to 2 to 5 percent of the mortgage, so it’s important to be financially prepared for this expense.”
Use this mortgage calculator from Bankrate to estimate how much you'll need to pay in closing costs.
Frequently asked questions regarding closing costs.
When do you need to pay your closing costs?
You'll need to pay your closing costs at the closing of your home purchase. This is when the final paperwork is signed, and the property officially changes hands.
Who pays closing costs?
It's common for both the buyer and seller to split the cost of closing fees. However, this isn't always the case. It's important to discuss who will be responsible for paying closing costs before you start shopping for homes.
Can you negotiate closing costs?
Yes, it's possible to negotiate who pays closing costs. You'll need to discuss this with the seller before making an offer on a home.
What happens if you can't pay your closing costs?
If you can't pay your closing costs, you may be able to roll them into your mortgage. However, this will likely increase the size of your loan and the amount of interest you'll pay over time.
Earnest Money Deposits
When you find a home you're interested in purchasing, you'll need to make an offer to the seller. Part of that offer will include an earnest money deposit (EMD). An EMD is a deposit made by the buyer to show that they are serious about purchasing the property. The EMD is typically 1-2% of the purchase price and is held in escrow until closing.
Frequently Asked Questions about EMD deposit.
What are the benefits of making an EMD deposit?
The main benefit of making an EMD deposit is that it shows the seller you're serious about purchasing their home. It also gives you some negotiating power and can help you seal the deal on a home.
What happens if you can't make an EMD deposit?
If you can't make an EMD deposit, you may still be able to purchase the home. However, this will likely require a higher down payment and/or a higher interest rate on your mortgage.
When does the EMD get refunded to the buyer?
The EMD is typically refunded to the buyer at closing. However, there are some situations where the EMD may be forfeited. For example, if the buyer backs out of the deal or the home doesn't appraise for the purchase price.
What happens if the buyer backs out of the purchase after putting down an EMD deposit?
If the buyer backs out of the purchase after putting down an EMD deposit, they may forfeit their deposit. It's essential to be sure you're ready to purchase a home before making an offer, as you could lose your EMD if you back out of the deal.
Can the EMD be used towards closing costs or the down payment on a house purchase?
The EMD deposit is typically not used towards closing costs or the down payment on a house purchase. The EMD is a deposit made by the buyer to show that they are serious about purchasing the property and is typically refunded at closing.
Budgeting for a home purchase can seem daunting at first, but it doesn't have to be. By breaking down each expense and doing your research ahead of time, you can ensure that you're prepared for every eventuality.
If you have further questions about budgeting for a home purchase, please don't hesitate to contact us. Let’s connect so you’ll have a real estate expert to answer any questions you have along the way.