Do I Need Money to Purchase a Home?
The short answer is YES. Recently I have been working with several clients who did not really understand that they would have some expenses related to purchasing a home that could not be financed. I hope the information below helps to sort out some of the costs. I encourage every buyer to discuss Pre-qualification for financing and the costs associated with purchasing a home with a REALTOR, prior to beginning your search.
When purchasing a home, they buyer will usually need some money prior to closing to pay for deposits, inspections, appraisals and homeowners insurance.
Once the Realtor assists the buyer in finding a home, an offer on the home is determined and negotiated between the buyer and the seller. The offer will include an “Earnest Money Deposit” where the buyer shows the seller they are ready to commit to the purchase and have the means to do so. The amount of the deposit varies with the purchase price and is consider to be part of the downpayment on the home. If the buyer sincerely attempts to get financing for the purchase and is unable to do so, most often the deposit is refunded. I often see deposits of $500 – $1000 depending on circumstances.
Home Inspections are not always required to purchase a home. If the buyer has knowledge of construction, electrical and plumbing, then they may feel that a home inspection is not necessary. Not all lenders require a home inspection. If a buyer does not have this experience, then a home inspection is often recommended. The home inspector will look for any obvious structural, electrical, plumbing or safety issues in the home and make recommendations for having them corrected. A home inspection can average $350. Home inspections are a general inspection and in no way should be considered to identify all potential problems in a home. In addition, other inspections may be recommended, such as inspections of a septic system, well, radon gas, insects such as termites or bees to name a few. Each of these specific inspections will have an additional charge.
Most mortgages will require an Appraisal of the homes worth. The lender chosen by the buyer will set up the appraisal of the home. The appraiser will go to the home and compare it to other local homes to determine a value. The appraised value of a home must equal, at a minimum, the amount of a buyers requested mortgage. Appraisals typically average $500 which will be paid to the Lender.
Once the home passes inspection and the appraisal is accepted by the lender, the buyer will then need to purchase Home Owners Insurance at an amount specified by the lender. The cost of homeowners insurance can vary dramatically and a new buyer should “shop” for the best coverage and pricing. The cost of a Homeowners Insurance Policy will depend on the value of the home and is purchased prior to closing.
Many other costs are associated with the purchase of a home and are included in a buyers “Closing Costs“. These include the downpayment, lender fees, mortgage insurance premiums, recording fees, title insurance fees, and attorney fees. In addition, in many cases, an escrow account will be started to cover the cost of property and school taxes and next years home owners insurance. The lender can give a buyer an estimate of these costs along with an estimate of what their monthly mortgage payment will be prior to making an offer on a house. Depending on the type of mortgage program applied for, the buyer MAY be able to include some of these costs in the monthly mortgage payment.
ALL BUYERS ARE ENCOURAGED TO FULLY DISCLOSE AND DISCUSS THEIR FINANCIAL STATUS AND MORTGAGE OPTIONS WITH A LENDER AND/OR REALTOR PRIOR TO REQUESTING HOME SHOWINGS. Many Lenders offer 1st Time Homeowners clubs to assist with preparing for the purchase of your first home.
I hope this information helps all of my readers get off on the right foot when considering a home purchase. Every buyer has a different set of circumstances and every home purchase is a unique transaction. Don’t be afraid to ask questions!