What To Save for When Buying a Home

What To Save for When Buying a Home

Understanding the costs involved in buying a home can seem daunting, but with the right information, you can manage the process confidently. By getting a clear idea of the potential expenses you might face upfront, you take control and make informed decisions.

Here are a few key expenses that experts recommend you consider as you prepare for your home purchase:

1. Down Payment

Saving for a down payment is often a major focus when planning to buy a home. However, the amount you need might not be as much as you think. While many people believe that a 20% down payment is required, this isn't always the case unless specified by your loan type or lender. In fact, there are several home loan options available that require as little as 3.5% down, or even no down payment at all. An article from The Mortgage Reports provides further details:

"The amount you need to put down will depend on a variety of factors, including the loan type and your financial goals. If you don’t have a large down payment saved up, don’t worry—there are plenty of options available . . ."

A trusted lender will discuss different loan types with you, explain any down payment requirements, and inform you about down payment assistance programs for which you may qualify. The more informed you are ahead of time, the smoother the homebuying process will be. The key to obtaining the necessary information and making the best decision for your situation is to work with a professional who can tailor advice to your specific needs.

2. Closing Costs

Ensure you also set aside funds for closing costs, which encompass a variety of fees and payments due to the various parties involved in your transaction. These costs can include fees for the loan origination, home inspection, appraisal, title search, and legal services, among others. Understanding these expenses is crucial, as they typically range from 2% to 5% of the purchase price of the home. Bankrate provides a detailed explanation of these costs:

“Mortgage closing costs are the fees associated with buying a home that you must pay on closing day. Closing costs typically range from 2 to 5 percent of the total loan amount, and they include fees for the appraisal, title insurance and origination and underwriting of the loan.”

When it comes to closing costs, a trusted lender is your go-to resource for guidance and clarification. They can break down the specific fees you'll encounter and provide an estimate of the total amount you should prepare to pay. This helps ensure you approach your closing day with confidence.

Additionally, as you budget for closing day, remember to account for your real estate agent’s professional service fee, in case the seller does not cover it. Typically, you'll discuss and agree upon this fee with your agent well in advance, ensuring there are no surprises as you finalize the purchase. This proactive planning allows you to fully understand and prepare for all potential costs associated with buying your home.

3. Earnest Money Deposit

If you want to be thoroughly prepared, consider setting aside funds for an earnest money deposit (EMD). According to Realtor.com, an EMD usually ranges between 1% and 2% of the home's total price and is paid as a demonstration of good faith when you submit an offer on a house.

However, it's important to note that the EMD is not an additional expense. Rather, it acts as a credit toward some of your upfront costs. Essentially, you are allocating a portion of the money you've already saved for your home purchase to reassure the seller of your commitment and seriousness about buying their property. Realtor.com explains how this deposit functions within the framework of your transaction:

“It tells the real estate seller you’re in earnest as a buyer . . . Assuming that all goes well and the buyer’s good-faith offer is accepted by the seller, the earnest money funds go toward the down payment and closing costs. In effect, earnest money is just paying more of the down payment and closing costs upfront.”

Remember, an earnest money deposit (EMD) isn't mandatory, and it doesn't ensure that your offer will be accepted. It's crucial to consult with a real estate advisor to comprehend what's most suitable for your circumstances and to familiarize yourself with any specific requirements in your local area. Your advisor will provide guidance on the strategic moves to consider, helping you make the most informed decisions throughout the buying process.

Bottom Line

The foundation of a successful homebuying savings strategy lies in being well-informed about what you need to save for. Understanding the various costs involved allows you to prepare adequately. With the assistance of an expert real estate agent and a trusted lender, you'll receive the necessary guidance and information to confidently navigate the homebuying process. This support helps ensure that you are prepared for every financial aspect of purchasing a home.