If you’re thinking about buying a home, you have a lot of financial decisions to make. Your Lender and your agent can assist you in “running” some numbers to figure out
- how much you can afford to pay monthly
- what size mortgage you are comfortable taking
- how much in closing costs you are going to be paying above and beyond the cost of the home.
But one practical question the sometimes gets overlooked is:
How much cash will you need to have on hand to buy a home??
Though it is possible to buy a home with little or no cash on hand by pursuing 100% financing and folding the closing costs into your purchase, this is becoming more uncommon in times of tightening credit, and it is helpful to understand how a more typical transaction works:
About the terms Good Faith Deposit, Down Payment and Cash for Closing
When you make an offer on a home, it is customary to give the Realtor an amount of money as a good faith deposit ( also called the earnest money deposit) to demonstrate to the Seller you are vested in the process and serious. This deposit can range from as little as 1% to as much as 5% of the offer price or more, particularily in new construction. We can discuss the suggested amount in greater detail as the time draws nearer. Any good faith deposit is usually paid by check when you make the offer. On a resale home, the deposit is held in escrow by the Real Estate firm and simply goes towards the purchase price and closing costs. On a new construction home, the good faith deposit is generally deposited into the funds of the builder, but it still counts towards your purchase and in most circumstances, you are entitled to have it refunded if the transaction does not close. When we review the contract, we will review the terms of your good faith deposit. But essentially, you need to have this money “in the bank” when you make the offer.
The term down payment refers to the total amount of your personal funds you will combine with the funds borrowed from the lender in order to achieve the total purchase price. This is not an additional expense above and beyond the amount you offered on the home, but just a way of saying “how much money am I contributing to the purchase price of the home”. If you are borrowing 80%, then your down payment is 20%. It is quite typical that some or all of this down payment is coming from the sale of your current home.
The term cash for closing refers to the total amount of money you are going to bring to the closing, usually by transferring the funds electronically to your settlement agent . Generally this amount is calculated by taking
the Purchase Price of the home plus
the Closing Costs =
your total outlay minus
the Amount of the Loan and minus
the Good Faith Deposit which is being held in escrow already.
A note about Inspection fees:
You are responsible for paying for any home inspections and specialized tests (such as radon) which are conducted on your behalf as part of the purchase process. This is one inescapable expense: you can only avoid it by not doing inspections; and it is an expense you may incur even if you ultimately decide NOT to buy the home based on what is found during the inspection. The cost of the standard home inspection varies with the size and nature of the property and can range from $200 to $600 or more. Typically , a radon test costs around $150. A septic test can range from $350 and upwards and I recommend them for older properties on septic systems.