Upfront costs of buying a home: What you need to save for

What costs do you pay upfront when buying a house?

Many home buyers only think about the down payment when they’re saving for a house. But you’ll also pay a slate of upfront fees (known as “closing costs”) on your purchase.

The actual amounts needed for both the down payment and closing costs can vary by a wide margin. The good news is, you have a lot of control over what you’ll pay.

If you understand your options and choose your mortgage wisely, you can seriously minimize your upfront costs when buying a home.

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What are the upfront costs of buying a home?

There are several costs that you must pay upfront and out-of-pocket to buy a house. Collectively, these add up to your “cash to close.”

Upfront home buying costs include:

  • Earnest money — 1% of purchase price or more (paid first but goes toward your down payment)
  • Down payment — Varies (average is 6-12%)
  • Closing costs — 2-5% of home loan amount
  • Prepaid property taxes and home insurance — 6-12 months’ worth

It’s crucial to be aware of the upfront costs associated with buying a home so you can set your expectations realistically and have enough cash on hand when you find the property you want.

“Knowing what to expect upfront can make a home buyer better prepared,” says Jason Gelios, a Realtor in Southeast Michigan.

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

“The external price of a home listed is not the final payment for a house closing deal. Technically, other fees are involved. Prospective buyers must consider such factors carefully for them to avoid confusion,” says Belcher.

Let’s dig into each item — and what you can expect to pay — a little further.

1. Earnest money

Also called a ‘good faith deposit,’ earnest money usually takes the form of a wire transfer or personal check paid to the seller shortly after your offer is accepted. This money demonstrates to the seller that you’re serious about purchasing the property.

Note that the seller doesn’t keep the earnest money for themself. Provided the deal goes through, your earnest money will be applied to your down payment at closing.

When you make a good faith deposit, your check will be held by a third party, title company, or the buyer’s agent and may not actually be cashed. If it is, the monies are kept in an escrow deposit account and indicated as a credit to the buyer at the closing table.

Earnest money needs to be paid within three days of your offer being accepted, so make sure you have liquid cash available when house hunting.

Earnest money can be paid in one or two installments. Two installments are more common for larger loan sizes and less-qualified borrowers.

“The first installment is usually smaller and can be returned to you if you find something unexpected during the home inspection and decide to no longer move forward with your offer,” says Guadalupe Sanchez, founder at Budgeting in Blue in Chicago. “The second earnest payment is the larger of the two and typically made before your closing day. Your earnest payments are counted toward your down payment and closing costs.”

“These funds usually need to be made within three days of mutual acceptance of your offer, so you need to have those funds in hand and ready to spend,” says Paige Shulte, a Realtor with Windermere Professional Partners in Gig Harbor, Washington.

Earnest money commonly equates to 1% of your offer price, unless you need to be more competitive with your offer, in which case it can represent up to 10% of your offer price.

If you want to purchase a $300,000 home, for example, your earnest money cost will likely be at least $3,000. But remember, this will go toward your down payment at closing.

2. Down payment

You’ll also need to make a down payment that counts toward the home purchase price.

Many home buyers think they need 20% down, but in fact, the average is a lot less. First-time home buyers put down just 6% on average and repeat buyers average a 12% down payment

Low-down-payment loans are available, too. An FHA loan can be had for as little as 3.5% if you are eligible; some conventional loans need only a 3% down minimum; 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 which types of mortgage loans you qualify for and how much cash is required for each one.

Keep in mind that the higher your down payment is, the more likely your offer will be accepted by the seller.

On a $300,000 house, expect your down payment to range from $9,000 to $60,000 based on your chosen loan type.

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3. Closing costs

Your down payment isn’t the only sum 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 the lender’s fees, appraisal, inspection, and other third-party service fees. Count on paying 2-5% of your loan amount in closing costs.

You can see a full list of closing costs here. A few of the major ones include:

  • Mortgage application, origination, and underwriting fees
  • Commission fees for your agent or broker
  • Home inspection
  • Home appraisal
  • Title search, insurance, and survey
  • Property recording and transfer taxes
  • Attorney fees

Using the $300,000 home purchase example, you’ll probably pay between $6,000 and $15,000 in closing costs.

4. Prepaid taxes and insurance

“During closing, you’ll likely be required to also pay for a year’s worth of homeowners insurance coverage and most likely at least six months of property taxes,” adds Sanchez.

Today, the average yearly homeowner’s insurance premium is about $1,250. And Most U.S. homeowners pay around $2,500 a year in property taxes, on average. That adds up to approximately $2,500 you’d need to save for 12 months of homeowners insurance and six months of property taxes. (However, this can vary a lot 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 up to the next tax due date,” Gelios notes. “The first year of homeowners insurance is collected at closing, with many lenders escrowing that cost to lower their risk of borrowers letting it lapse.”

Note that you may not have to pay these costs upfront if you put at least 20% down and decide not to open an escrow account for your taxes and insurance. But then you’ll be responsible for paying them on your own rather than having your mortgage lender handle the arrangements.

Technically, prepaid taxes and insurance are usually lumped into closing costs. But it’s helpful to explain them separately so that you can better understand these costs and compartmentalize them as unique expenses.

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How much cash do you need to save to buy a house?

Many home buyers can get into a home with as little as 3-5% down. And closing costs are typically 2-5% of the mortgage balance. That means to build an appropriate savings cushion, home buyers need to save at least 10% of their purchase price at a minimum. And that’s only if they know they’ll qualify for a low-down-payment loan.

“For [a] home buyer who doesn’t qualify for any special mortgage options, they should plan to save roughly 25% of 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 plan to have at least $75,000 saved, which gives you some flexibility and cushion by the time you reach closing.”

Using the previous $300,000 home purchase example, you will probably need to save the following to pay for the upfront costs of buying a home:

Upfront Cost Low Estimate High Estimate
Home Price $300,000 $300,000
Earnest Deposit* $3,000 $15,000
Down Payment $9,000 $60,000
Closing Costs $6,000 $15,000
Total Upfront Cost $15,000 $75,000

*The earnest deposit will be credited toward your other expenses at closing, so this cost is not counted separately in the total

Clearly, the cash-to-close can vary a lot depending on your down payment amount and closing costs.

Some of this is up to you. For instance, you can choose how much money you want to put down, with options ranging between 3% and 20% on a conforming loan. And you can shop around with different lenders to find the cheapest closing costs.

But some factors that impact your home buying costs, like location, property tax rates, and service fees, are out of your control.

So make sure you get accurate estimates for your upfront costs and plan accordingly. Get pre-approved by a lender before you start house hunting so that you’ll have a clear picture of your down payment options, closing costs, and how much cash you’ll 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 you may be eligible for that can reduce the upfront costs of buying a home. 

“Each state has its own down payment assistance programs in place to aid in the dream of homeownership. In my state of Michigan, for instance, we have MSHDA, a program that allows for down payment assistance in certain zip codes. It’s best to consult with your agent and lender to get information on all your available programs,” Gelios recommends.

Check out these links for helpful down payment and closing cost assistance program resources:

Get started on your home purchase

While all home buyers pay virtually the same set of upfront fees, the actual dollar value will look very different from one buyer to the next.

Your total upfront home buying costs 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 lender before you shop for a home. Your mortgage lender will tell you exactly how much you need for your down payment and closing costs. And that will allow you to set a savings goal and shop for a home within your price range.

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