Understanding Home Buying Costs: What to Budget For
Buying a home can feel overwhelming, especially when it comes to budgeting. But it doesn’t have to be. By getting a clear understanding of the upfront costs involved, you can take charge of the process with confidence.
Here are three key expenses experts recommend considering as you prepare for homeownership:
1. Down Payment
For most buyers, saving for a down payment is the first step. However, the notion that you need 20% of the purchase price is a common misconception. Depending on your loan type, you may need much less—some loans require as little as 3.5%, or even 0% down.
According to The Mortgage Reports:
“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 knowledgeable lender can help you explore different loan options, down payment requirements, and even programs offering down payment assistance. By working with a trusted professional, you’ll be equipped with the right information to make a decision that fits your financial situation.
2. Closing Costs
It’s important to also plan for closing costs—fees and payments associated with completing your home purchase. These typically range from 2% to 5% of the total loan amount and cover expenses such as appraisals, title insurance, and loan origination fees.
Bankrate explains:
“Mortgage closing costs are the fees associated with buying a home that you must pay on closing day.”
Your lender can walk you through these costs in detail, giving you a clearer picture of what to expect and how to prepare. Additionally, budget for your real estate agent’s professional service fee if the seller doesn’t cover it. Your agent will discuss this with you in advance, so there won’t be any surprises.
3. Earnest Money Deposit (EMD)
To further strengthen your offer, you may want to plan for an earnest money deposit. Typically ranging between 1% and 2% of the home’s price, an EMD is a good-faith payment you make when submitting an offer.
Realtor.com describes it as:
“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.”
An EMD isn’t an extra cost—it’s applied toward your down payment or closing costs if your offer is accepted. While not always required, it can make your offer stand out. Be sure to consult with your real estate advisor about whether this step makes sense for your situation.
Take Control of Your Home Buying Journey
Budgeting for a home purchase may seem daunting at first, but with the right preparation and expert guidance, it’s manageable. By understanding the costs associated with buying a home—like the down payment, closing costs, and earnest money deposit—you’ll be better equipped to navigate the process smoothly.
Bottom Line: Work with a trusted real estate advisor and lender to develop a clear plan tailored to your goals. This way, you can make confident, informed decisions as you move closer to finding your dream home.