Cash Needs When Purchasing a Home
Purchasing a new home is an exciting time. But there are costs associated with it that prospective homeowners need to factor into their decision. While renters typically need a security deposit and their first month’s rent, home buying requires cash for several purposes, such as the following:
Earnest money deposit: Your offer for a home should be accompanied by an earnest money deposit to show the seller you are serious about buying their home. The amount of your deposit will vary according to the size of your down payment, local market customs, the value of the home you are buying and market conditions. Earnest money amounts may vary. However if you plan on making a down payment of 3.5% to 5% you should plan for a deposit of at least 1%, or $2,000 on a $200,000 home.
Down payment: Generally, buyers need to make a downpayment of at least 3.5% for a government-insured Federal Housing Administration loan—and at least 5% or 10% for a conventional loan. Some loan programs allow some or all of your down payment to be a gift, but many require that at least 5% or more comes from your own funds.
Closing costs: Closing costs vary by your location and your loan program, but you should plan to budget 3% to 6% of your home value for these costs.
Cash reserves: Some loan programs require you to have two or three month’s worth of mortgage payments on deposit as your emergency fund. Even if you are not required to have that amount, you should have an emergency fund to cover at least three to six months—or more—of expenses even after you have completed the home buying process.
Moving costs: Whether you are moving locally or long distance, you will need funds to pay for the move and the associated expenses of settling into a new home.
While you probably can’t come up with an exact figure this early in the home buying process, you should be able to develop a general estimate of your cash needs based on an idea of your price range for a home. For example, on a $200,000 purchase you would need a bare minimum of $16,000:
- $2,000 for a 1% deposit
- $5,000 for the remaining 2.5% of your 3.5% down payment
- $6,000 for 3% closing costs
- $3,000 for a bare-bones emergency fund to cover approximately three months of mortgage payments
Delina Stearns (NMLS #256751) is the Real Estate Manager at Legacy Community Federal Credit Union. For 30 years she has been helping families finance their homes…from that starter home to your dream home.