The amount of money required for a down payment tends to get most of the attention in articles about saving to buy a home. Often, these articles are fixated on one number: 20. As in the 20% down payment that many think is needed to buy a home.
In the real world, most people are not putting 20% down. Far from it, in fact. But there are a few other things that you may need to have some money for even if you are not making a large, or any, down payment.
Earnest Money Deposit (EMD)
After you find the home you wish to purchase you will need to sit down with your agent and fill out the terms of your offer. It is customary for a deposit to made at the time of the offer. The deposit is not given to the seller with the offer, it is held by your agent, but it is noted in the offer. The EMD tells the seller you are serious and, beyond the symbolism, is a promised payment to the seller for their time and costs should you back out of the transaction for any reason not covered by a contingency in the contract.
If you back out of the contract due to a situation in which you are protected by a contingency, the deposit is returned to you. If everything is successful and you close on the purchase, the EMD will be credited to you at closing and be put toward your down payment and closing costs. The amount of the EMD can vary based on the prospective buyer’s ability and what is reasonable and customary for the area. Your Realtor will be able to offer insight on an appropriate amount.
A typical real estate transaction often involves dozens of businesses and people performing hundreds of tasks to pull together all of the required information and actually affect the transfer of title. It has become quite mundane and commonplace; but, if you think about it, it is kind of a big deal. You are buying a small piece of the Earth, legally recognized in documentation process that dates back over a thousand years in English common law that migrated to America with the first settlers.
Back to the present – naturally, those businesses and people want to be paid for their services. There will likely be some lender fees in addition to the “third-party” fees charged by service-providers such as the appraiser, the title company, the settlement agent, perhaps a surveyor, and so on. Some other charges, known as pre-paids because they are things you will pay over the life of the loan but you must pay some upfront such as interest, taxes, and insurance, are often lumped into the term “closing costs” as well.
The good news is you will receive an estimate of these costs right from the start and you may be able to negotiate with the seller to have them pay some or even all these costs. Keep in mind, however, that asking the seller to pay the closing costs may weaken your offer, something to avoid if there is reason to believe your offer will be competing. This is something you should discuss with your agent.
Another thing you may need some money for is reserves. The great thing about reserves is that they stay yours after the transaction and do not have to be forked over to someone else. Reserves are the cash assets you will have left after you complete the purchase of the home. Depending on the loan program and the overall strength of your mortgage application, reserves may be required to be approved for the loan. A common reserve requirement is two months, meaning two months’ worth of the total mortgage payment on the new loan. A percentage of any 401(k) or other retirement account is an often-used source of reserves.
If you would like a more specific idea of how much money you would need to purchase a home, do not hesitate to contact me. I can help you put together the information you need to make informed decisions and achieve your goals.