How much money do you have to have in hand to buy a home?

A lot of people are under the impression that they cannot afford to purchase a home at this point in their life but how do you know if you can afford to buy if you don’t know what the cost is?

It’s a simple concept that you need to know the price of something before you know whether or not you can afford it, however, buying a home isn’t like buying an item at the local market. When you buy at the market the cost is listed on a tag and you know by previous experience that you have to add sales tax to that and you have a total cost. When talking about the cost to buy a home there are a number of variables that make a total cost something that isn’t as cut and dry as a price tag and simple addition. A home’s affordability factor is composed of a few major factors that dictate what the final out the door cost will be including 1. asking price, 2. your down-payment, 3. your choice of loan program, 4. earnest money deposit, 5. inspection costs and 6. settlement costs.*

1. Asking Price: The bigger the price tag on the house the more difficult it becomes to afford to buy. If you are looking at the biggest and freshest home in town you are likely looking at a big cost based solely on the fact that the home is expensive. It’s a no brainer to say that the cheaper homes in the market are more affordable.
2. Your Down-payment: Depending on how well you have done on saving your pennies and how big your down payment fund is you will be able to afford more home. Once again it’s a no brainer but a part of the equation. Generally speaking a down payment is a minimum of 3% of the purchase price of a home and 10% is preferable. So figure for every $100,000 of asking price you will need between $3,000 and $10,000.
3. Your Choice of Loan Program: This ties in with the down payment because as you start shopping for loans you will see that with larger down payments lenders give better rates, terms and discounts. A prime example of this in action is a buyer with 20% down payment on a home that receives a lower interest rate on a 30 year fixed rate mortgage while also being given the opportunity to avoid Private Mortgage Insurance on their loan. The lender gives the break because they get more money up front and the buyer has less risk to them, thus the lender can be more competitive with their options. You will also run into the condition to get a loan to have home owner’s insurance to a specified value by the lender with many loans as well as miscellaneous other costs that the lender will explain.
4. Earnest Money Deposit: These are the funds that you submit with you purchase contract as a goo faith deposit into escrow. This money is held in an account until the purchase of a home is complete prior to being released to the seller as a part of the total consideration and is generally there to show the seller that you genuinely do want to buy their home and as such are willing to put that money on the line to cover any costs for material damage that you or your inspectors may cause during the purchase process. A REALTOR® can give you an idea of what that cost would be. Locally, $5,000 grand does the trick.
5. Inspection Costs: Having a home inspection and a pest inspection on a home that you are buying comes highly recommended. It allows you to see a report that details any existing and potential problems with the property before you sign the final signature to buy the home. Inspections are a different conversation altogether so in keeping on track here let’s get back to the point. Inspectors need to make money too! They get paid by you when you employ them to look at a house that your interested. In my home town a home inspection can range anywhere from $350-1,000 and up and a pest inspection generally starts at $125 for a standard home. That being said depending on what you ask of the inspector things can get price pretty quickly. Also, if you decide to have a home inspected by trade specialists that’s going to tack on some extra there (trade specialists include, structural engineers, geological and soils engineers, roofers, electricians and plumbers.)
6. Settlement Costs: These are the costs associated with escrow, title and lending activities to get you the keys. An escrow account is a third-party, neutral bank account where all funds and documents are held while the buyer and seller perform their responsibilities prior to transfer of the property and is a delicate process that is handled by an escrow and title officer at a specialized company. The fees charged by the company are generally for administrative tasks that they perform such as title searches, printing, obtaining title insurance, assigning notaries, wiring funds, reviewing documents and facilitating the transfer of documents to the county recorders office. When planning on the cost for that figure it to be around 3% of the total purchase price. Depending on your local market a buyer may pay the full 3%, the seller may pay the full 3% or they may split it. This is all determined by how the purchase contract is designed.

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