Chapter 3: Plan For Up-front Costs

There are many costs associated with getting your foot in your very own door.

Down Payment
While a 20 percent down payment used to be the norm, by obtaining a second mortgage or purchasing mortgage insurance it is now possible to purchase with as little as three to five percent down. Keep in mind, however, that a substantial down payment works to your advantage the more you have, the better the financing deal, the less you have to borrow, and the lower your monthly outlay.

Earnest Money
Earnest money is a cash deposit of about two percent of the price of the home. It proves to the seller that you are serious about wanting to buy.
When you submit your offer, the money is deposited into an escrow account. If your offer is accepted, it will be applied toward the down payment. If it is rejected, the money will be returned to you, provided it is stipulated in the contract.

Closing Costs
Closing costs include all fees required to execute the sales transaction, such as attorney fees, title insurance, appraisals, points, and tax escrows. Typically paid up front, the average cost of these fees is three to five percent of the purchase price.

Post-purchase Reserve Funds
You may need to prove to the lender that you have enough money to protect against potential cash flow problems. Most lenders like to see at least two months’ worth of housing payments in reserve, either in savings or assets.

The Extras
Extras are everything from moving costs to new furniture. If you plan to buy a fixer-upper or a home that doesn’t come with major appliances, these expenses will have to be planned for. The price of "extras" will vary greatly. First time homebuyers are often strapped for cash though, so prioritizing non-essential expenses is important.