Acquisition prices when shopping for a home: What you want to save on

What expenses do you pay upfront when buying a home?

Many homebuyers only think about the down payment when saving for a home. But you also pay a number of upfront fees (known as "closing costs") for your purchase.

The actual amounts required for both the down payment and closing costs can vary widely. The good news is that you have a lot of control over what you pay for.

By understanding your options and choosing your mortgage wisely, you can seriously minimize your upfront costs when buying a home.

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What are the acquisition costs when buying a house?

There are several costs that you must pay up front and out of pocket to buy a home. Together these add up to your cash to closing.

Prepayments for buying a home include:

deposit — 1% of the purchase price or more (paid first but counts toward your deposit)down payment — Varies (average 6-12%) closing costs — 2-5% of the home loan amountPrepaid property taxes and home insurance — Worth 6-12 months

It's important to be aware of the upfront costs associated with buying a home so that you set realistic expectations and have enough cash on hand when you find the property you want.

"Knowing what to expect in advance can help you be better prepared as a homebuyer," says Jason Gelios, a southeast Michigan real estate agent.

Dan Belcher, founder and CEO of Mortgage Relief, agrees.

“The external price of a listed home is not the final payment on a home sale. Technically, other fees apply. Potential buyers need to carefully consider such factors to avoid confusion,” says Belcher.

Let's dive into each item – and what you can expect to pay – a little further.

1. Serious money

Also known as a "good faith deposit," the serious money usually comes in the form of a wire transfer or personal check paid to the seller shortly after your bid is accepted. This money shows the seller that you are serious about buying the property.

Note that the seller does not keep the money earned for themselves. Provided the deal goes through, your deposit will be offset against your deposit upon closing.

If you make a deposit in good faith, your check will be held by a third party, title company or buyer's agent and may not actually be cashed. If so, the funds are held in escrow and shown as a credit to the buyer at the closing table.

The deposit must be paid within three days of accepting your offer, so make sure you have cash on hand when looking for an apartment.

Labor allowance can be paid in one or two installments. For larger loan amounts and less qualified borrowers, two installments are more common.

"The first installment is usually smaller and can be refunded to you if you find something unexpected during the home inspection and decide not to pursue your offer," says Guadalupe Sanchez, founder of Budgeting in Blue in Chicago. “The second upfront payment is the larger of the two and is usually paid prior to your graduation day. Your upfront payments will count toward your deposit and closing costs.”

"These funds typically need to be made within three days of mutual acceptance of your offer, so you need to have those funds on hand and be ready to spend them," says Paige Shulte, a broker at Windermere Professional Partners in Gig Harbor, Washington.

Money raised is typically 1% of your bid price, unless you need to be more competitive with your bid, in which case it can be as much as 10% of your bid price.

For example, if you want to buy a $300,000 house, your serious cash cost will likely be at least $3,000. However, remember that this will benefit your deposit upon completion.

2nd deposit

You must also pay a deposit that counts towards the home purchase price.

Many home buyers think they need 20% less, but in fact the average is much less. First-time home buyers pay an average of just 6% and repeat buyers pay an average of 12%

Loans with a small down payment are also possible. An FHA loan is available for as little as 3.5% if you qualify; some traditional loans only require a minimum deposit of 3%; and Zero Down is required for a USDA loan or VA loan.

If you're not sure how much down payment you need, talk to a lender about what types of mortgage loans you qualify for and how much cash each requires.

Remember that the higher your deposit, the more likely your offer will be accepted by the seller.

For a $300,000 home, expect your down payment to be between $9,000 and $60,000 depending on the loan type you choose.

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3. Closing Costs

Your deposit isn't the only amount you'll have to pay on closing day. There are also upfront closing costs. These cover all the fees required to set up your mortgage loan, including lender fees, appraisal, inspection and other third-party service fees. Expect to pay 2-5% of your loan amount in closing costs.

A full list of graduation costs can be found here. Some of the most important are:

Mortgage application, origination and insurance feesYour agent or broker commission feesHome InspectionHome ValuationTitle Research, Insurance and SurveyProperty Registration and Transfer TaxesAttorney's Fees

Using the example of a $300,000 home purchase, you'll likely pay between $6,000 and $15,000 in closing costs.

4. Prepaid Taxes and Insurance

"During closing, you'll also likely have to pay home insurance for a year and most likely at least six months of property taxes," adds Sanchez.

Today, the median annual homeowner's insurance premium is about $1,250. And most homeowners in the US pay an average of around $2,500 a year in property taxes. That adds up to about $2,500 that you would need to save for 12 months of homeowners insurance and six months of property taxes. (However, this can vary wildly based on location, home price, and more, so make sure you get an accurate estimate from your lender.)

"Prepaid taxes are collected at the time of closing and are estimated from the date of closing to the next tax due date," notes Gelios. "The first year of homeowners insurance is collected at closing, with many lenders escrowing these costs to reduce the risk of borrowers letting them lapse."

Note that if you pay a minimum of 20% down payment and choose not to open an escrow account for your taxes and insurance, you may not have to pay these costs upfront. But then you are responsible for paying them yourself instead of letting your mortgage lender make the arrangements.

Technically, prepaid taxes and insurance are usually factored into closing costs. However, it's helpful to explain them separately so you can better understand these costs and break them down as a one-time expense.

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How much money do you have to save to buy a house?

Many homebuyers can get into a home with only a 3-5% discount. And closing costs are typically 2-5% of the mortgage balance. This means that in order to build up an adequate savings cushion, homebuyers must save at least 10% of the purchase price. And only if they know they qualify for a low down payment loan.

"For (a) homebuyer who doesn't qualify for special mortgage options, they should save about 25% off their target purchase price," recommends Martin Orefice, founder and CEO of Rent To Own Labs.

"So if you're looking at homes in the $300,000 range, you should save at least $75,000, which gives you some flexibility and cushion until closing."

Using the previous $300,000 home buying example, here's what you probably need to save to pay for the upfront cost of buying a home:

costs in advancelow estimateHigh estimateHouse Price $300,000 $300,000 Down Payment* $3,000 $15,000 Down Payment $9,000 $60,000 Closing Cost $6,000 $15,000 Total Upfront Cost $15,000 $75,000

*The deposit will be applied to your other expenses at checkout, so these costs are not counted separately in the total

Of course, cash-to-close can vary wildly depending on the down payment amount and closing costs.

Some of it is up to you. For example, you can choose how much money you want to deposit, with options ranging from 3% to 20% on a conforming loan. And you can look at different lenders to find the cheapest closing costs.

But some factors that affect your home-buying costs, such as location, property tax rates, and service fees, are beyond your control.

So make sure you get accurate estimates for your upfront costs and plan accordingly. Get pre-approved by a lender before you begin your home search so you have a clear picture of your down payment options, closing costs, and how much money you need to save to afford the home you want.

Down payment and closing cost assistance

Here's some good news: There are down payment and closing cost assistance programs that you may be eligible for that can reduce the upfront cost of buying a home.

“Each state has its own down payment assistance programs to support the dream of home ownership. For example, in my state of Michigan, we have MSHDA, a program that provides down payment assistance in certain zip codes. It's best to check with your agent and lender for information on all the programs available,” Gelios recommends.

Follow these links to find helpful resources for down payment and closing cost assistance programs:

Start with your home purchase

While all homebuyers make virtually the same upfront payments, the actual dollar value will vary greatly from buyer to buyer.

Your total upfront cost of buying a home will depend on your loan type, location, mortgage lender, mortgage rate, and a number of other factors.

For this reason, you should get a firm estimate from a mortgage banker before you decide to buy a home. Your mortgage lender will tell you exactly how much you need for your down payment and closing costs. And that allows you to set a savings goal and buy a home in your price range.

Ready to start?

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