Buying a home is an intense process, especially for first-timers. I ended up buying a home in July 2013. It was a crazy experience, and since then I've gotten a lot of questions about how to buy a home (and even written a book on the topic of millennial homeownership!), so I've compiled all of my knowledge here.
Below is the 30,000-foot view of what buying a home looks like and some very common FAQs. My ultimate goal with this piece is to empower first-time buyers to ask questions and feel confident about the purchasing decisions they make.
How to Buy a House in 8 Steps
Step 1 – Assess your readiness
Ask yourself: Is it better to rent or buy?
I don't regret purchasing my home, but there are a million little incidentals and life lessons that will completely blindside you if you're used to living in an apartment. I got so inspired by all the things I didn't know about homeownership, I wrote my first book about it.
… But in the very first chapter, I include a section on how to tell if you're ready.
Here's the thing – homeownership isn't a one-size-fits-all deal. And while I think owning a home (especially as an investment) can be great for your finances, if it doesn't jive with your values or lifestyle, then what's the point?
Financially speaking, if you live in an area where it is cheaper to rent, and you can afford both a mortgage and home maintenance (about 1% of the purchase price of your home each year, according to The Balance)…then buying is better because you can build equity in the home.
But there's also value in being a renter if that's the type of lifestyle you desire.
There are many benefits to being a renter including:
- Flexibility – A 12-month lease is much easier to get out of than a 30-year mortgage, and you can be choosy on where you want to live. Plus, you’re able to move around whenever you want to or need to.
- Maintenance – If something breaks in the house or apartment, all you have to do is call the landlord. (This is great if you’re not that handy!)
- Smaller emergency fund – As a renter, you can have a smaller emergency fund because you’re not responsible for home maintenance and upkeep and there are fewer up-front costs to rent.
Ask yourself- Do I really know where I want to settle down?
I moved off to New York at 23. After two years in the city, I wanted to move back home to Georgia, and not just for the interim. Having had the experience of living far away from home was an amazing thing because it taught me what I did and did not want.
I knew that moving back south was (most likely) for the long haul, so I felt comfortable with the decision to put down some official “roots,” but for many, the '20s are a time of exploration.
Being unfettered by a mortgage means you can take that job in another state or move abroad if you so desire. Whatever your financial best life looks like, you can pursue it.
Making home ownership affordable in your 20's really only works if you can commit to your home for at least five years (either living in it as your primary residence or renting it out.)
You should consider these things too when trying to decide where you'd like to lay down roots:
- City, Suburban, or Rural – Do you want to live in a bustling city, a suburb division, or a wide-open rural area? There are pros and cons to each, and each one will affect your mortgage loan terms, commute to work, utility payments, household maintenance, and personal sanity.
- Affordability – Is the area you’re looking at affordable? This goes beyond your mortgage loan amount and housing expenses. Look at the distances you’ll travel to work every day as well as the cost of gas and utilities in the area. What are the state and city taxes? How much is food and overall cost of living in the area?
- Employment Opportunities – Are there numerous employment opportunities in the area? You’ll be committing to living there for at least 5 years, if you lose your job, will you be able to pick up another job fairly quickly with your current skills and the job market in the area?
Real Estate Value – What are the current home prices and local housing trends for selling and renting? You can use online sources like Zillow.com to check out the area before you buy.
- Climate – How is the climate throughout the year? Is it too hot in the summer for you, or too cold in the winter? Believe it or not, things like this will affect your budget (and your sanity) by affecting utility prices, car maintenance, and consumables such as food and clothing.
- Distance from Relatives – Knowing how far you are from family will affect travel expenses and how often you may need (or want) to travel.
- Culture and Entertainment – If this is important to you, where are the libraries, theaters, restaurants, and museums located and how far are they from the house you’re looking at purchasing?
- Proximity to Important Resources – How far will you be to hospitals, police stations, and fire stations? Believe it or not, for some insurance companies it matters how far your home is to the nearest fire and/or police station and it will sometimes affect home insurance premiums.
- Local Crime Rates and Statistics – What are the local crime rate statistics in the area you’re thinking of purchasing?
You can get a ton of census information like population, demographics, crime rate, climate, resident age, home and rental pricing, income data and more from CityData.com for just about every city in the US.
I know, it sounds like a lot of work, but since it is (likely) the most expensive purchase of your lifetime, don’t you think you should get some
Ask yourself: can I financially handle a home?
But LB, you ask, how do I know if I'm ready to take on the financial responsibility of being a homeowner? I mean…I have a job…
Here are some indicators you could take on the fiscal responsibility of a mortgage.
- You’re Debt Free or Almost There – Taking on a 15-30 year home loan while you still have other debts is just asking to be in debt for the rest of your life. Before taking on the largest debt you’ll ever have, it’s best to get rid of all other debt before taking on a mortgage.
- Steady Employment – You should plan on staying in your new home for at least 5 years, it just makes financial sense. So, it’s important to have stable employment that will be there for at least as long as you’ll have your mortgage loan.
- You Already Have Extra Money Set Aside – You should already have extra money set aside specifically for closing costs and down payment (This could be anywhere between 3%-5% of the home’s purchase price – possibly $2000-$10,000), extra cash for moving expenses, and a small emergency fund.
You Have Good Credit – If you know your credit score is decent and that your credit report doesn’t contain any errors then you’re ahead of the game. A good credit score to buy a house is at least 700-760 or greater.
- You’ve been Pre-Approved for a Home Loan Already – You can get pre-qualified with any lender, either the bank you have your checking and savings accounts with, or with specific home lenders.
- You Can Afford the “Hypothetical” Monthly Payment – After doing some homework and getting pre-approved, can your household budget afford the monthly mortgage payment?
Step 2 – Check your credit
The first step in getting financially prepared to buy a house is to check your credit – both your report and score.
Credit Score vs. Credit Report – What's the difference?
Credit Report – This contains detailed information about your personal and financial history. It has information like name, (maiden, changed, or other), social security number, all addresses that you may have lived at, phone numbers, employers information, current, and past loans, bankruptcies, repossessions, liens, and whether or not you’ve had any late payments or collections against you.
Credit Score – Your credit score is a numerical value attributed to you based on the current financial activity of your credit (your use of loans and credit cards). And it is calculated from the information contained in your credit report.
This number is used by lenders, landlords, insurance companies, and some employers. Your score is used to determine your overall financial reliability and will fluctuate from month to month depending on how you manage your credit.
Why do I need to check my credit report if I already have the score?
Because your credit score is calculated based on the information in your credit report, it’s very important that you make sure there are no errors in your report. You could erroneously have a lower score, and a lower score could mean higher interest rates and a needlessly more expensive home loan for you.
Here's the 411:
- There are actually four major credit reporting agencies that keep information on you (Innovis has been around since 1970 – but no one talks about them): Equifax, Experian, TransUnion, and Innovis.
- You can request a report from each of them for free at least once a year by visiting their website directly or visiting the Federal Trade Commission’s Website.
- If this is the first time viewing your credit report, request a copy of your credit history from all four credit reporting agencies or at least the three main ones so you can review the information they have on you.
- Make sure all the information they have on you is correct.
Take care of this as soon as you can. Fixing errors on your report can sometimes take several months, and some errors or issues may not be able to be resolved. For example, an erroneous late payment report for a closed account may not be able to be removed due to certain circumstances. In this case, you’ll just have to let it fall off after a few years.
For more on how to improve your credit, click here to read the credit guide.
What Kind of Credit Score Do I Need to Buy a House?
Typically, a higher FICO credit score will give you more home loan options, better loan rates, and lower down payment requirements.
People can qualify for a mortgage with scores as low as 500 but will be required to come up with a hefty down payment and have higher interest rates. On the other hand, if you have a FICO credit score higher than 760, you’ll have access to the best interest rates, better mortgage loan incentives, and lower down payment requirements.
That’s why knowing your credit score and making sure your credit report is free of errors is the first step in getting financially prepared to buy a home.
But don’t give up if you find out your credit score is not where you want it to be. You can always improve it, and just because you have a low score, it doesn’t mean you won’t qualify. A lower score simply means you will need to have a larger down payment and a higher interest rate.
Step #3 – Calculate affordability
The next step in getting prepared to buy a house is finding out how much you can afford. Affordability is critical because once you close on a house, you don’t want to drown in payments and become “house poor.”
When lenders look at your finances to approve you for a loan, they only look at your income and debts.
They don’t take into consideration the other things you need to afford. Things like homeowner association fees (HOA) fees, savings for an emergency fund, retirement contributions, utilities, home maintenance fees, lifestyle and entertainment costs, grocery and gas expenses, etc.
This is how so many get qualified for way more than they can actually afford.
And why it’s important to know what your household budget can afford when it comes to buying a house. Do your own math and don’t be pressured into saying yes to the full amount of what the lender says you’re qualified for.
So, how do you calculate how much house you can afford?
The Quick Math
A quick and easy rule some financial experts use is to make sure that your monthly mortgage payment doesn’t exceed 28% of your take-home pay.
- For example, let’s say your monthly income is $4000 and your expenses and bills are $1000. Minus expenses from your monthly income and multiply that by 28%.
- $3000 x .28 = $840. In this example, monthly mortgage payments (including insurance and taxes) would be $840. You would make sure your monthly payments don’t go over $840 in this example.
- Based on your monthly income, this should ensure there would be enough money left over in your budget for other expenses.
A More Detailed Calculation
Of course mortgages and household budgets can get complicated, so here’s a mortgage calculator that offers a few more metrics. It shows how much you could afford based on annual income.
- Play around with the numbers by adding a few more metrics such as HOA fees, down payment and closing fees, location, and insurance, check out Nerdwallet’s mortgage calculator.
- If you already know how much you have for a down payment and the type of loan you’ll be using, LendingTree has an affordability calculator that will give you a simple breakdown with debt-to-income ratio, or you can use their handy mortgage calculator that has more factors to consider.
Step #4 – Tend to Your Savings
Okay, so you know how much you can afford for a mortgage, but what about that down payment?
If you don't have a large nest egg or a gift from family members, it's time to start trimming the budget and start saving aggressively. Here are a few of my favorite ways to save more money and ways to make fast cash for larger financial goals such as saving for a down payment.
- Automate Your Savings – Figure out how much you can reasonably save after expenses such as rent, utilities, groceries, and a bit of “fun money.” If you don’t know where to start, Elizabeth Warren’s 50-30-20 method is a great way to start.
- Ask for a Raise – Is it time for your annual review at work? While nerve-wracking, asking (and receiving) an increase in pay is essential for financial well-being, and especially helpful when saving for a home.
- Just be sure to automate any increase into your savings account, so it doesn’t get spent each pay period. Even a small 3% cost of living adjustment would net $1,500.
- Cut Out Unnecessary Bills – conduct an audit of all your bills to identify areas of savings. Review every expense: every insurance payment, cell phone bill, automatic subscription, and see where the areas of costs savings are. New services (such as BillCutterz) even do the heavy lifting for you and can reportedly save consumers $250.00 a month.
- Find Unique Ways to Earn More – Focus on ways to earn more instead of saving.
There is no limit to ways you can earn money in your free time. Here are more ideas:
- Here's how to hustle $100-$5,000 bucks.
- Take on non-creepy side jobs on craigslist. Here's the guide.
- 8 ways to quickly build up savings.
- Create a better budget to make saving easier.
- The 5 easiest things to cut from your budget.
- Start your own business (or a small “side hustle.”) Here's the complete how-to.
- Start blogging (here's how I made over $160,000 with mine.)
- Qapital rounds up your purchases for you automatically! It really adds up!
- Make some quick cash by filling out surveys in your spare time. Here are the ones I like!
- Plus other ways to build passive income.
- Ask for a raise + other ways to earn more money at your 9-5
Step 5 – Familiarize yourself the different types of mortgages
Before I go into how to shop/get prequalified for a mortgage, I want to break down the different types of mortgages and how these can affect how much it costs to buy a home. Below is a quick “hit list” of the different types of mortgage loans available to most home buyers.
Conventional (Standard) Loan
- Conventional loans are not backed by a government agency like the FHA, VA, or USDA loans.
- A conventional loan can either fall into the conforming loan or non-conforming loan category. (Depends on the size of the loan.)
- You must have good credit (at least 620-640) and money saved for the down payment and closing costs to qualify for this loan.
- Buyers do not need to occupy the home at closing (the government-backed loans require that you use them as a primary residence.)
- Private mortgage insurance is a requirement if you cannot provide at least 20% down payment at closing.
- This loan is backed by the Federal Housing Authority (FHA) and helps first-time homebuyers or people with low credit scores.
- You can qualify for an FHA loan with a credit score as low as 500-579, but you will need at least 10% down payment of the home’s purchase price, a debt-to-income ratio of less than 43%, as well as other requirements.
- To qualify for the 3.5% down payment, you’ll need to have a credit score of no lower than 580.
- There are also 203k mortgage loans to help you pay for renovations on a fixer-upper and more traditional options like a 15-year mortgage.
FHA 203k Rehabilitation Loan
- A 203k is a home loan product where you can borrow money for home renovations at the same time you borrow money for a mortgage, and it lumps the funds all together as one mortgage loan.
- Down payment requirement is low at 3.5% but there is a lot of paperwork involved.
- You have to hire a professional contractor to do the repairs/renovation.
- This is a government-backed loan for military veterans.
- The US Department of Veterans Affairs backs part of the loan for qualified military service members, veterans, and qualified spouses.
- You don’t need a very high credit score to qualify.
USDA Rural Loan
- This loan is a government-backed loan designed to help low-income families purchase homes in rural and suburban areas with fewer than 35,000 people.
- This type of loan works similar to the FHA and VA loans. You can finance 100% of the loan with low (or no) closing costs, and a low PMI.
- There are household income limits (1-4 persons: $82,700).
- Only certain areas qualify for purchase, and you need at least a 650 credit score to qualify.
What is a conforming vs. non-conforming loan?
A conforming loan is a loan that falls underneath a certain limit and is backed by the government (Fannie Mae and Freddie Mac.) The Federal Housing Finance Agency that regulates the housing market puts a cap on conforming loan limits (for single-family homes it’s $484,350, and in high-cost areas, it’s $726,525).
A non-conforming loan is aptly named – because it doesn't conform to the limits set by the government. What that means is that any loan over these amounts wouldn’t be guaranteed by Fannie Mae or Freddie Mac and are considered much riskier.
Because of the high amounts these loans are sought after by homebuyers looking to purchase luxury homes or homes in highly competitive housing markets. Jumbo loans require high credit scores and large down payments because of the higher risk to lenders.
What's the difference between a fixed rate loan vs. adjustable rate mortgage (ARM)
After choosing your mortgage, you’ll also pick what type of interest rate program you want.
- Fixed Rate Mortgage – Keeps your interest rate the same for the life of your loan (usually 15-30 years). Your rate will never change, even if housing interest rates go up or down. For example, at closing your rate is at 4% and will remain there for the life of your loan unless you refinance.
- Adjustable Rate Mortgage (ARM) – This means the interest rate will fluctuate based on market indicators after an initial period (typically anywhere from 3, 5, 7, or 10 years). Your interest rate may increase (or decrease depending on the market) the longer you hold on to your loan. So, if you’re planning on moving out around 5 years, an ARM could get you a much lower interest rate at the time of closing than that of a fixed rate loan.
Step 6 – Get prequalified
How do I Get a Mortgage?
After you hone in on where you want to lay down roots and take the time to improve your credit, it's time to roll up your sleeves and get pre-qualified for a mortgage. This is what you'll need in order to start seriously shopping with a real estate agent.
Here's how to obtain a mortgage:
- Get a loan (or get pre-approved if you haven’t yet) through an online lender like LendingTree, Quicken Loans, or Rocket Mortgage.
- Find mortgage loans through your regular bank or through other financial institutions like USAA, or Chase, or through local credit unions.
- You may also enlist help by hiring a mortgage broker. A broker will do all the leg work. He or she will find a lender for you, ensure all the paperwork is for the loan and title agency, and see everything from the start of the loan through closing.
- Find a local mortgage broker by doing a google search or asking friends or your real estate agent.
It’s important for you to do your own research first since most real estate agents won't work with you until you've got the pre-qualification letter in hand from a lender.
Plus, since most lenders may approve you for more than you can reasonably afford anyway, it’s best to know how much home you can afford. And this shows the realtor that you mean business.
Step 7 – Complete the home search
Below are some “house hunting to do's” to ensure you find a house that's juuuuust right.
Build Your Wishlist
Everyone has a wish list for what they want in a home, whether you are currently looking, in a home already, or still renting and compiling a list of “must haves” for the future. I've been making a list in my head since I was ten, and even though I own a home currently, I still think about what features I'd like to have in the future.
Here's a chart of what I had on my wish list back when I bought my first home in 2013 and how the home I bought stacked up.
Obviously, if you watch enough house hunters you'll know that wish lists don't line up with budgets most of the time, but it is still good to have a rough idea of what you'd like before aggressively beginning the search. A wish list will also help an agent find homes best suited to your needs.
Do a Drive-By
House hunting is exciting. Truly. It is also exhausting. Before you make an appointment to physically see a home, leverage the internet to do a little bit of detective work. See if any photos are available online. Those will go a long way to narrowing down your list.
Then, before you ever make an appointment, do a drive-by of the home(s) you're interested in. Do one drive by during the day time, and then another at night for each house.
Neighborhoods can look a lot different during the day, or you may notice a few issues with the home during the drive by that weren't noted/pictured on the internet listing. This was crucial for me, as I was able to narrow down ten homes off my initial list of 20 just by doing drive-bys.
Best of all this can be done on your own time, so you're only truly visiting homes with your realtor that you have vetted.
Make an offer
Ask your realtor to research comparable properties in your area before you make a bid. Whatever the average selling price of other homes in the area is, try to start a little bit lower in case the seller wants to negotiate (which…for 99% of cases, they will. They have financial goals too!)
Try to avoid a “bidding war” at all costs. From my own experience, a bidding war becomes more about emotions than good common sense. I ended up bidding way too much on the home I have now. I won the war but later had to fight the bank to reduce the price after the inspection turned up a lot of damage.
Sometimes I wonder how much I would have saved had I bid a bit more conservatively. Research, and doing a second tour of the home during a bidding war can help with this.
Step 8 – Due diligence and mortgage underwriting
Prepare for an Appraisal
I mentioned above the need for an appraisal. Since the housing crash of 2008, many banks have tightened their lending terms.
Lenders will no longer approve a mortgage on a home if it does not appraise for that value, no matter how much you're willing to pay for a home, or if the home falls under the amount you're pre-approved for.
This can frustrate many buyers who fall in love with a home but do not have the cash to cover the difference between the seller's asking price and the appraisal.
I remember being on pins and needles during the appraisal process for my current home, but thankfully the home (after renovations) appraised for the home value + the upgrades, so I was able to get the money I needed to renovate.
Get (And Attend!) an Inspection
Since you pay an inspector to do a walk-thru of the home and they prepare a written report of the findings, I've known many homeowner friends who skipped the inspection. No! Bad! Wrong! Completely wrong.
The inspection is for you. In addition to finding out if anything is wrong with the home, this is your chance to learn where the breaker box is, the water main, and all appropriate shut-off valves.
Plus, having the potential buyer there guarantees a more thorough inspection. (People behave differently when they're being watched- it is proven.)
- Find a qualified inspector through friends (or Angie's List, like I did)
- Ask to see an example of the final report before you hire someone. You want it to be THOROUGH with pages (15+) of documentation and photos.
- Once you get a report with any potential damages, get estimates for the fixes. It will be up to the seller to either fix them or provide a credit at closing.
Keep your cool during the underwriting process
Underwriting is just a fancy word for “qualifying for a loan.” You know, you pre-qualify and then you have to actually prove you can pay back the loan you are asking for.
Here are a few of the “standard” documents you will be asked for during the underwriting process.
- Check stubs (usually for the past 30 days.
- W2's for the last two years.
- Any additional proof of income you may have like your stock portfolio, alimony/child support whatever.
- Bank statements, usually about three months worth.
- A letter stating your employment and rental history for the past two years.
- A home buyers training seminar certificate.
- Tax returns and the transcripts which have to be ordered from the IRS.
- Copies of all of my rent checks to my current landlord.
And if you have a side hustle, or freelance or work for yourself….
- Be prepared to show copies of checks from clients in addition to your tax returns (I printed mine off of my bank's website.)
- Three months of PayPal statements if you earn money online.
If you are planning to buy a home and don't know where these are, I suggest you locate them immediately.
Finally, after alllllll of the above, you get to attend the closing and snag the keys to your first home. Here's what to know about closing:
- Typically, the closing date is set in the offer letter for 30 to 60 days after the offer is accepted. This can change depending upon a variety of factors, including inspections and paperwork processing with the lender.
- At least three days before closing the closing attorney will mail the Loan Estimate and the Closing Disclosure. Both of these tools explain the loan terms, like interest rate and other costs associated with the loan (taxes, recording fees, etc.).
- Depending on the state you live in, the closing may take place at the closing attorney’s office or the title company.
- It’s the buyer’s right to choose the closing attorney.
- The fee for the closing attorney is often included in the closing costs.
Read the full post on what to expect at closing, here.
How to Buy a Home: Frequently Asked Questions
How long does it take to buy a house from start to finish?
LB To add copy
How much does buying a home cost?
But there are also lots of other fees that can be associated with buying a home, particularly if you are buying a foreclosed home, getting an FHA loan, or lumping renovation costs in with a mortgage via a 203k loan (which is also what I used). Here's an example of fees I paid:
- Earnest Money ($500-$1000)
- Home Inspection ($300-500)
- Home appraisal ($4-500),
- a HUD Consultant fee (only if doing a 203k renovation loan)
- $250 in document preparation fees to an attorney at closing
- $15 for a home buyer's education class
- $30 in cashier’s check fees and postage.
For more on fees related to buying a house, check out this lengthy post I wrote for Opendoor.
How can I save money when buying a home?
Look into Down Payment Assistance Programs
This is my favorite home buying tip. Down payment assistance is how I was able to save so much on my closing and then turn around and use the extra cash towards renovating the house.
Finding assistance programs is as easy as googling “[state] down payment assistance” – so why wouldn’t you?
And much like scholarships for college, there are other avenues of assistance for just about everyone. Are you a single mother? A veteran? You could qualify for even more funds!
Improve your credit
Knowing your credit score is so important to potential homebuyers. This little number will be what mortgage brokers look at when determining how much you can borrow – and what interest rate you’ll pay.
If you’re looking to buy a home but don’t have great credit, consider taking time to pay down your debts before you make a huge investment like a home. Having good credit can open up your options as far as mortgage rates and even help you afford a down payment.
LB To add: For example, in this Bankrate article, someone with a
Put down the full 20% downpayment
Once you agree to borrow more than 80% of the home’s value, you’ll typically have to pay for private mortgage insurance (or PMI).
PMI is an extra monthly charge is a protection for the lender in the event you default on your loan.
To avoid taking on an extra PMI payment to your loan, try to save up at least 20% of the total cost of the home.
Even though it’s difficult to save up the full 20% as a first-time buyer, it will save you SO MUCH money over the long term.
How can I make affording a home a reality?
Option #1 – Familial contributions
Don't qualify for any programs or don't have any available in your area? Family members can contribute a tax-free gift (Up to $14k per person, so $28k for you and a spouse) to help cover the down payment or closing costs on your first home.
I recommend leveraging the money for closing and moving costs rather than factoring it into the financing of the home. This helps ensure you only buy a home you can reasonably afford.
Option #2 – Rate Shop
Perhaps you won't be able to swing an $1800 home purchase like I did. Perhaps you don't want to! The more you pay for a home, the more expensive it becomes, which is why if you want to keep costs low it's important to rate shop, from everything to the mortgage to the home insurance.
Getting the lowest interest rate on your mortgage is the #1 way to save money on your first home purchase. Here's where you can comparison shop rates and lenders hassle-free, without impacting your score.
Option #3 – Buy for Now, Not Later
The best way I was able to buy a home so cheaply is because I bought a cheap house – something small and in my budget that I could reasonably afford. Of course, this meant hard choices, and I know it is fairly obvious advice, but less is more. Personally, I believe home ownership should be a good move for your finances and not something that contributes to more financial stress.
How much money do I need to save up for a home?
The quick answer is the more money you can save, the better! But the deeper answer really depends on your particular home-buying situation.
Down Payment/Type of Loan
- The size of your down payment will depend on the size of your loan.
- Example: the loan you’re trying to qualify for is $250,000, and you need to have a 3.5% down payment. You’ll need $8750 as a down payment.
- Nerdwallet has a down payment calculator you can use to give you an idea of how much you may need.
- Closing costs vary but are usually 3-5% of the cost of the loan amount.
- Example: Let’s say the loan is $250,000, your closing costs (administrative fees) would be $7,500 to $12,500.
- On some loans, the closing costs roll into the mortgage loan amount, and for some, the seller pays closing costs.
- Earnest money is usually 1-2% of the purchase price of the loan. It's meant to convey to the seller you're serious about purchasing their property!
- The buyer writes a check to the seller at the beginning of the contract. Then the broker or title company holds the money for the remainder of the sale.
- If all goes well, the money goes toward the closing costs or brokerage fees at closing.
- Some lenders require buyers to prove they have money in the bank to cover the mortgage payments for the first months of the loan.
- For example, if your monthly mortgage payments are going to be $1000/month, the lender may want to see that you already have $1000 – $6000 in the bank at closing.
- Not all lenders will require this, so it’s important to ask up front.
How much does home maintenance cost?
- Home maintenance costs are the one factor that most people tend to forget when preparing to buy a house.
- . Financial experts agree on saving 1-3% of the purchase price of your house annually, for starters.
- Example: You purchase your home for $185,000. This means you should be saving at least $1850 per year for maintenance ($155/month).
Age/Current Condition of the House
If you’re purchasing an older house with older appliances, you may need to save up more money before purchasing your home. If household appliances are 10+ years old at the time of purchase, expect to replace or repair them within the next 1-5 years. Especially big-ticket items like air conditioning, heating, roofing, refrigerator, electrical, plumbing, etc.
This is why a home inspection can give you an idea of how much work may need to go into the home before you buy.
Are you purchasing your home in a wet, humid area like Honolulu, or a dry, hot city like Phoenix?This will factor how often you’ll need to maintain things like a roof, windows, and doors. You don’t have to worry so much about mold in the desert as much as you do in the tropics.
Conversely, is your home in an area subject to environmental extremes like Minnesota? Or, is your home near water, near a mountain, or in a flood area? All these can factor into whether you may need to save a little more money for extra maintenance. Put closer to 3 or 5% of the purchase price of the home. Just in case.