Money Matters - How Much Money Will I Need to Close?

Dated: 06/23/2020

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Most buyers think about the obvious money matters, such as how much the monthly mortgage payment is going to be, what the terms of the loan and interest rate are, and how much it will cost to move or set up utilities, etc.  And most also realize they need to put money down, but rarely have a clue how much is required.

Many first-time homebuyers, and those who haven't purchased in awhile, are often shocked when their real estate agent or lender tell them how much money they need for a down payment or closing costs.  This post will hopefully help you, as a buyer, learn what to expect when it comes to cold, hard cash needed to purchase a property, and when that money is due.

Here is a chart to help you see the typical or average costs associated with buying a home.

Keep in mind every loan and every transaction is different and unique based on a variety of factors, including your personal credit score, home values, property location, loan terms, lender options, and others.  

So, what does this chart translate into when purchasing a home? 

Let's create an example.  You are purchasing a home for $250,000.  You pay $50.00 to apply for the loan.  You learn that you qualify for an FHA, 30-year, fixed-rate loan, which requires 3.5% down.

Once your offer is accepted, you have three days to wire transfer the initial deposit (a/k/a "Ernest Money Deposit/Down" or "EMD") of 1%, which equals $2,500.

The EMD IS part of your total down payment, and will be deducted from the final down payment that is due just prior to or at closing.  More on this in a minute.

In this example, you pay $375.00 for the home inspection, which is typically due either upon ordering the inspection or before the inspector releases the report.

Within about 3-5 days prior to your scheduled closing, you will receive a Closing Disclosure (CD), which gives you a thorough breakdown of all the costs (line-by-line) associated with your transaction.  This will come from either your lender or more likely the closing agent at the title company or law firm assigned to your transaction.

Using this example, let's say the CD shows you still owe the balance of your deposit, which is $6,250 and closing costs of $10,000.

In the past, most title companies or law firms would require you bring with you a cashier's check or money order for each of the final items in your transaction.  However, the standard practice now is to wire transfer the funds within 24 hours of your closing.  This option is the best option because both the amount of your final deposit and closing costs MUST be received by the closing agent before you can sign any documents and complete the purchase of your home.

Each title company or law firm has their own policies and procedures.  So, it's always best to find out from the closing agent exactly how they want you to pay, and follow their instructions.

Hopefully, this example helps you paint the picture in your mind what it may cost you to buy a home.  Of course, it didn't factor in moving expenses, utility deposits, or other misecellaneous expenses associated with buying and moving into a new home.  

But it does give you a rough estimate on what to expect so you are not completely surprised.

I highly recommend you save yourself a lot of headache and heartache by saving or setting aside cash based on this formula:

Required Down Payment + 3-5% for Closing (I like to tell clients 4% is the sweet spot)

One thing I have learned in my own personal real estate transactions and those of my clients is that even when you qualify for ZERO down loans, ALWAYS have around $5,000 - $10,000 of accessible cash anyway.  Real estate is not a cookie-cutter, one-size-fits-all process.  It is very fluid and differs from buyer to buyer.  

Often, buyers don't have a lot of cash set aside for a purchase.  What then?

You still have options to consider:

  • Down Payment Assistance Programs (DPA) - ask your lender what options you may qualify for.
  • 401(k), IRA, Annuities, Pension Plans - often you can pull money from these plans for closing costs and down payments.  As your financial broker or employer about these options.
  • Second Mortgages - lenders can often offer short-term second mortgages to help with closing and down payment costs.
  • Private Lenders - while they typically won't fund home purchases (unless it's an investment property), private lenders may offer short-term loans (but with high interest rates) to help homebuyers.
  • Grants - states, like Florida, and some non-profit organizations provide grant dollars that will help with home buying costs.  These typically are for lower-income households or those who meet specific criteria or fit within a specific genre of buyers (such as veterans, aging, disabled, minority, first-responders, educators, law enforcement, etc.).  

Here is a FREE resource to help you identify some of the great programs in your area that you may qualify for:

Down Payment Resource

To find a lender that can help you with programs:  CLICK HERE and select the "LENDERS" tab.

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