How Much Money Do You Need To Buy A House

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Regardless if you are buying your first home or your fifth, you may be wondering how much you need to buy a house.

Knowing how much money you need is the first step in buying a home... especially in Colorado Springs.

Even if you are confident you can afford the average costs of buying a home, you will still want to review the information below to understand your options better and avoid any surprises or hidden costs.

We will cover the 4 (four) most common costs involved in buying a home in Colorado and, more specifically, the Colorado Springs area, as well as some of the most frequently asked questions.

We will cover:

- Each of these costs in the order that you will (when applicable) experience them
- A brief and easily understood explanation of the cost
- The estimated costs for each item listed
- Whether it is required or recommended
- Tips on how to avoid out of pocket costs when possible

Let’s Get To It!

Earnest Money 

What is Earnest Money:

Earnest money is essentially a good faith deposit and ensures that the home buyer is serious about purchasing the home. This is the only recourse the seller has if the home buyer backs out the contract (purchase of the home).

This should be the first and only out-of-pocket costs of buying a home up to this point.

Required:

All purchase contracts will require a form of Earnest Money.

When is this due:

The earnest money deposit is usually expected within 48 hours of a mutually accepted contract (both the buyer and seller have approved the contract and plan to move forward).

Approximate cost:

The seller, with the guidance of the seller’s agent, is usually responsible for setting the earnest money amount. Still, in Colorado Springs, you typically see earnest money run approximately 1-2% of the home's list price.

Payment Type:

A personal check is ideal, though you can also use a money order, promissory note, or a bank cashier’s check.

When financing, lenders will require documentation of the earnest money being paid, so you will want to confirm with your lender what exactly they will need for documentation. This is normally a copy of the check, and it was clearly your bank (bank statement).

More details:

Since this is more or less a deposit, the home buyer will be credited the entire earnest money amount at the closing (where all final documents are signed, funds collected and distributed, and transfer of ownership happens).

The entire amount of the earnest money will first be credited towards any costs the home buyer is responsible for (if applicable, closing costs, down payment, etc.). Any remaining funds will be refunded to the home buyer at closing via a title company check.

That said, this cost is not truly in addition to the other applicable costs as these funds (earnest money) will be applied to the other costs or refunded at the time of closing.

Note:

A home buyer can terminate the contract and be refunded the entire earnest money amount if the buyer and seller cannot agree on specific contract terms.

These contract terms would include the inspection resolution, the home not appraising for the purchase price, or the home buyer's financing falling through.

To terminate a contract and be refunded, your earnest money will require specific actions by certain dates, so you and your agent will need to monitor the dates listed within the contract.

Pro Tips:

To avoid the out-of-pocket expense of the earnest money, you can offer a promissory note in place funds. This is essentially offering the seller an IOU, which is not a strong sign of commitment or the ability to qualify, and should not be considered in anything other than a buyer’s market (where there is plenty of inventory sitting).

When competing among other offers, and when possible, the higher your earnest money amount is (even to exceed the required amount), the more serious your offer is considered.

A home buyer can terminate the contract and be refunded the entire earnest money amount if the buyer and seller cannot agree on specific contract terms.

These contract terms would include the inspection resolution, the home not appraising for the purchase price, the appraised value does not meet the agreed-upon contract price, or the home buyer's financing falling through.

To terminate a contract and be refunded, your earnest money will require specific actions by certain dates, so you and your agent will need to monitor the dates listed within the contract.

Home Inspection & Additional Inspections 

What is a Home Inspection:

The home inspection is when a licensed, trained inspector thoroughly inspects all aspects of the home and will point out any concerns or issues that should be addressed. These inspections normally include inspecting the roof, foundation, electric, plumbing, HVAC, etc.

Recommended:

Everyone in the real estate industry HIGHLY recommends Home inspections. The only case where this may change is when purchasing a new build (being the first occupant).

When should this be completed:

Though there is no set time for the inspection to be completed, the home inspection is usually performed within the first 7 days of the mutually accepted contract.

The sooner the inspection is completed, the better, as it will allow you and the seller to negotiate a resolution to any inspection issues.

Approximate cost:

The home buyer inspection cost depends on the inspector, the size of the home, and where the home is located. Depending on the home type (condo, TH, SFH), the location, and the size of the home, the cost will range between $250-$500 in the Colorado Springs area. You and your agent would normally be responsible for hiring a home inspector, so you also potentially have some control over how much this will cost you.

Payment:

Payment is due at the time of inspection, and most home inspectors accept checks and credit cards.

More Details & Tips:

Depending on the home type, age of the home, and home location, there may be additional inspections or tests you may want to consider.

Each of these would be at an additional cost but check with the home inspector of your choice to see if they bundle the inspections/ services you are interested in.

- Radon Test

- Mold

- Sewer Line Scope / Septic Inspection

- Well Test

Appraisal 

What is an Appraisal:

The appraisal determines the value of the home, whereas the inspection determines the home’s condition.

Required:

When obtaining mortgage financing, an appraisal will be required by the lender to ensure the value of the home is adequate collateral for the loan amount.

If you are paying cash or using financing that does not require using the home for collateral, an appraisal is not required but is likely recommended.

When this should be completed:

The appraisal should be ordered and scheduled with the lender as soon as the buyer and seller come to a mutual resolution on any potential issues in the inspections.

Approximate costs:

The rates of appraisal fees have a similar range to inspection costs. These rates can range from $500 - $700.

Payment:

Payment depends on the lender, but most will collect credit card information upfront when completing a loan application.

Some lenders will charge the credit card on file when the appraisal is ordered, while others will collect this fee at closing and only charge the credit card on file if the loan does not close.

So, depending on the lender, this could be an out-of-pocket expense.

More details:

After inspection resolutions, the buyer or the buyer’s agent contacts the lender to inform them they are ready for appraisal.

The lender will then put an order in for an appraisal, where a third party will choose and schedule the appraisal.

This allows the buyer to have the fairest appraisal possible because none of the parties involved with your home buying process will have any direct contact with the appraiser.

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Down Payment 

What is Down Payment:

Down payment is the buyer's initial payment on the home, depending on the loan program you decided to use. It is often misconstrued that first-time buyers are the only ones that can get a lower down payment, but seasoned buyers are often also able to partake in loan programs that provide a lower down payment.

Required (depending on the loan program):

The VA (Veteran Affairs) home loan and USDA (US Dept of Agriculture) home loan is the only traditional home loan that offers 0 (zero) down payment.

Although there are many first-time home buyers and down payment assistance programs in Colorado that can reduce the required down payment for first-time homebuyers and seasoned homeowners to as little as $1000.

Approximate costs:

Down payment costs largely depend on the loan program the buyer decides to use.

Due to many finance options, the range of required down payment costs can vary anywhere between $0 to 20% of the purchase price, but the home buyer always has the option to put down as much money as they wish.

Payment:

Down payment, closing costs, etc., are all paid at the closing table and can only be good funds, meaning a bank cashier's check or wired funds (consult with the title company and agent to avoid wire fraud as it is it can be fairly common.

This total amount needed will be shared at the time of loan application and 3 days before closing on the closing disclosures.

NOTE: Remember, any earnest money will be credited towards any monies due at closing (down payment, closing costs, etc.).

More Details:

Sourcing funds for a down payment can be funds from any asset account (checking, savings, money market, stocks, etc.) from any borrower on loan, a gift in most cases are acceptable, and one can even utilize funds from their 401k.

Consult your lender when getting prequalified to determine the best way for you to source your down payment, as some methods require additional documentation and time to acquire.

Closing Costs & Pre-Paids

What are Closing Costs:

The typical closing costs associated with buying a home are recording fees, transfer taxes, escrows (homeowners insurance and property tax), fees, title insurance and fees, prepaids, discount points (if applicable), etc. First-time homebuyer closing costs and seasoned home buyers closing costs are often not much different from another. Many variables go into this cost.

Required but Negotiable:

In-home buying, who pays closing costs depends on what is decided amongst the buyer and seller. Home buying closing costs are required to be paid but are negotiable.

The home buyer can pay all closing costs in full, or the seller can, or they can be split, however, among the two. Negotiating closing costs are largely dependent on the market that you are in.

Example: In a competitive “Seller’s Market,” the buyer will likely pay everything that closing costs include.

Approximate costs:

When buying a home, how much closing costs are challenging to estimate due to the number of variables included.

Though, expert lenders in the Colorado Springs area will tell you that the average closing costs for buying a home are about $4,000-$6,000.

It is common to see information on the web that will state 1-3%, but since most fees that make up closing costs when buying a home are not flat fees rather than percentages, we find that $4000-$6000 will cover most transactions.

Payment:

When buying a home, closing costs are paid at the closing table, along with a down payment and more. It can only be good funds, meaning a bank cashier's check or wired funds (again, consult with the title company and agent to avoid any wire fraud).

NOTE: Remember, like your down payment, your earnest money will be credited towards any monies due at closing (down payment, closing costs, etc.)

Tips:

Depending on the loan program you are using, you can “cover” or “roll” the closing costs into the loan with a Lender Credit. This means the lender would lock your interest rate at a slightly higher calculated rate to provide a credit back to you for closing costs. And while we have historically low interest rates, this makes perfect sense to reduce the upfront costs of buying a home.

To explore these options, talk with your lender to see if you can use a lender credit to cover a portion or all of your closing costs.

This will work on several loan programs but needs to be reviewed with your lender to make sure the loan program you are considering will allow this and that it will not push your debt to income (DTI) out of the threshold due to the slightly higher interest rate.

In Conclusion...

As you can see from above, the down payment and closing costs are the largest expenses when buying a home. And with the down payment grant programs and the ability to roll closing costs into some of the loan programs, the cost to buy a home can be far less than most would expect.

Consulting with a knowledgeable Realtor and a knowledgeable mortgage lender before seriously looking at homes will help you determine your options and what costs you can expect.

From personal experience, I can say these brief conversations regularly open the door to homeownership for those who did not even think it possible and even provided better options for those already qualified to buy.

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