Buying a home involves more than saving for the down payment. Before you start touring homes or making offers, it helps to understand the full amount of money you may need before and at closing.
Your upfront costs can include your down payment, lender fees, appraisal, inspections, earnest money, prepaid taxes and insurance, and other closing expenses. Knowing what to expect can help you build a more realistic homebuying budget and avoid surprises later in the process.
1. Your Down Payment
The down payment is the portion of the home’s purchase price that you pay using your own funds rather than financing through your mortgage.
The amount required depends on the loan program you use. Some buyers may qualify for low-down-payment financing, while others choose to put more money down to reduce their monthly payment or improve their overall loan terms.
For example, on a $400,000 home:
- 3% down = $12,000
- 5% down = $20,000
- 10% down = $40,000
- 20% down = $80,000
You do not necessarily need 20% down to purchase a home. Your lender can explain which loan programs you qualify for and how different down-payment amounts affect your monthly payment.
2. Closing Costs
Closing costs are expenses associated with completing the purchase and financing of the property.
They are separate from your down payment and may include expenses such as:
- Loan origination or lender fees
- Appraisal fee
- Credit report fee
- Title-related expenses
- Attorney or settlement fees
- Recording fees
- Homeowners insurance
- Property tax adjustments
- Prepaid mortgage interest
- Escrow deposits
- Mortgage insurance, when applicable
Closing costs vary based on the property, loan program, lender, insurance costs, taxes, and the terms negotiated in your purchase agreement.
Your lender will provide a Loan Estimate early in the mortgage process showing your projected loan costs and estimated cash needed to close.
3. Earnest Money
When you submit an offer, you may include earnest money to demonstrate that you are serious about purchasing the property.
Earnest money is generally deposited after your contract becomes binding and is typically credited toward the amount you owe at closing.
It is important to understand the deadlines and terms associated with your earnest money because the contract determines when those funds may or may not be refundable.
4. Home Inspection Costs
A home inspection is another expense buyers should plan for before closing.
The inspector evaluates accessible components of the property and helps identify potential concerns that may need further investigation, repair, or consideration.
Depending on the property, buyers may also choose additional inspections or evaluations, such as:
- Termite or wood-destroying organism inspection
- Sewer scope
- Mold inspection
- Radon testing
- Structural evaluation
- HVAC inspection
These expenses are usually paid directly by the buyer and generally occur before closing.
5. Appraisal Costs
If you are financing the purchase, your lender will usually require an appraisal.
The appraisal provides the lender with an independent opinion of the property’s value and helps determine whether the home adequately supports the amount being financed.
The appraisal fee may be paid before closing or included among your lender-related closing expenses.
6. Prepaid Expenses
Some of the money you bring to closing is not technically a “fee.”
Your lender may require you to prepay certain homeownership expenses, including:
- Homeowners insurance
- Property taxes
- Mortgage interest
- Initial escrow reserves
These funds may be placed into an escrow account that your mortgage servicer later uses to pay your property taxes and insurance.
7. Mortgage Insurance
Depending on your loan program and down payment, mortgage insurance may be required.
Mortgage insurance protects the lender if the borrower defaults on the loan. It can affect both your upfront costs and your monthly housing payment.
Ask your lender whether mortgage insurance applies to your loan and whether it can eventually be removed.
8. Seller Contributions Can Affect Your Cash Needed
In some transactions, the seller may agree to contribute toward certain buyer closing costs.
This is commonly called a seller concession or seller-paid closing costs.
The amount a seller may contribute can depend on:
- The loan program
- Your down payment
- The purchase contract
- Lender guidelines
- Market conditions
- The strength of your offer
Seller contributions are negotiable and should not automatically be assumed when determining how much money you need to purchase.
9. Don’t Use Every Dollar for Closing
One of the biggest mistakes buyers can make is budgeting only enough money to get through closing.
Homeownership comes with expenses immediately after you receive the keys.
Consider keeping money available for:
- Moving expenses
- Utility deposits
- Furniture
- Immediate repairs
- Appliances
- HOA expenses
- Maintenance
- Unexpected homeownership costs
Your goal should not simply be to qualify to purchase the home. You also want to be financially comfortable after you move in.
How Much Cash Will You Actually Need?
Your total amount needed to purchase a home may look something like this:
Down Payment
- Closing Costs
- Prepaid Taxes and Insurance
- Inspection and Appraisal Costs
- Other Transaction Expenses
− Earnest Money Already Paid
− Applicable Seller or Lender Credits
= Estimated Cash Needed
The exact numbers will be different for every buyer and every transaction.
Start With the Numbers Before the House
Before falling in love with a property, understand what the purchase will require financially.
A conversation with a mortgage lender can help you determine:
- How much you may qualify to borrow
- Your estimated down payment
- Your projected closing costs
- Your approximate monthly mortgage payment
- Whether mortgage insurance applies
- Whether you qualify for down-payment or closing-cost assistance
- How much cash you should expect to bring to closing
Once you understand those numbers, you can search for homes with a much clearer picture of what fits your budget.
Planning to Buy in Metro Atlanta?
Understanding the financial side of buying a home before you start making offers can make the entire process easier to navigate.
As your real estate agent, I can help you understand the purchase process, evaluate properties, structure your offer, coordinate with your lender, and prepare for each step between your home search and closing day.
Explore your financing options, understand your estimated upfront costs, and start your home search with a clear financial plan.
