How Much Money Do You Really Need to Buy a West Chester or Liberty Township Home?
Date: December 12, 2018
Many first-time homebuyers wrongly assume that the only cash they’ll need to buy a West Chester or Liberty Township home for sale is the money needed for a down payment. Wouldn’t that be nice! Unfortunately, there are several other costs associated with purchasing a new home. It’s important to understand the full breadth of these costs when shopping around for West Chester and Liberty Township real estate.
Let’s take a look at how much cash it actually takes to buy a home. Where possible, we will point out ways that can reduce or even eliminate the additional cash requirements.
The Actual Down Payment
This is the only cash outlay in the home-buying process that’s obvious to most buyers. It is usually expressed as a percentage of the purchase price of the property. For instance, if you’re looking to buy a West Chester home for sale that’s listed for $250,000 and you plan to put down 10% of the purchase price, you’ll need to come up with $25,000 in terms of a down payment.
But how much do you really need for a down payment?
Well, we tend to suggest putting down 20% when possible. This helps homebuyers avoid paying additional private mortgage insurance (PMI), which can cost hundreds of dollars per month. But coming up with 20% is no easy task for many first-time homebuyers. Fortunately, there are several mortgage programs out there that allow homebuyers to put down as little as 3.5%. Those who are currently enlisted or military veterans may even be eligible to put down 0% towards their down payment!
A variety of mortgage programs exist so it’s important to shop around for loan programs before signing on the dotted line.
This is where things start to get a little complicated. This is because the cash outlay to make the purchase often becomes much higher than the down payment alone. And worse – it can be hard to predict how much you’ll owe in terms of closing costs when you first start shopping around for West Chester and Liberty Township homes for sale.
In general, we suggest budgeting for 2-3% of your total loan amount to hold aside for closing costs.
What does that look like? On a $250,000 mortgage, you’d need to come up with between $5,000 and $7,5000. That can be some real sticker shock for first time homebuyers. The range can vary depending on what you’re charged for appraisals, attorneys, and even title insurance.
Closing costs can also vary from one lender to another, and even from one loan to another. For instance, some lenders charge an application fee. Others charge “points,” so aptly named because they refer to one percentage point of your loan amount. An origination point refers to a lender seeking compensation for placing the loan. A discount point is often charged to lower the mortgage interest rate on a permanent basis. These points can add up!
There are a few ways to mitigate your closing costs.
Consider asking the seller to pay for your closing costs. This was common during the Recession, but in today’s competitive market, this could make your offer less competitive. It’s important to seek guidance from your West Chester or Liberty Township real estate agent before pursing this option.
Negotiate premium pricing with your lender. This is where you pay a higher interest rate on your mortgage in exchange for the lender paying the closing costs. Before you pursue this route, you’ll want to do a cost-benefit analysis to see what the long-term implications are. Saving a few thousand dollars up front could end up costing you much more over the lifetime of your loan.
These are probably the most confusing charges for West Chester and Liberty Township homebuyers, but they are completely necessary. With most mortgages, the lender will put real estate taxes and homeowner’s insurance in escrow. This means that those charges will be included in your monthly payment and paid by the lender when due.
In order for that to happen, the lender needs to collect certain amounts upfront, to ensure that the funds are available to make the payments when they are due. The escrow accounts are set up to pay the charges on the next due date, while a portion of your monthly payment replenishes the escrow account for the due date after that.
Depending on the frequency of real estate tax collections, the lender may have to put anywhere between two and 12 months of real estate taxes in escrow. If the taxes on the house are $250 per month, and a six-month escrow is required, that will translate to a prepaid expense of $1,500 at closing.
The same applies to insurance.
For homeowner’s insurance policies, you’re typically required to prepay a one-year homeowners insurance policy on the house, plus an extra two months of premium charges to the lender’s escrow account. The lender may also escrow one or two months of premiums for PMI as well, if required.
Utility adjustments can include a large number of charges. Luckily, they seldom come to more than a few hundred dollars. They basically represent utility costs paid by property seller in advance.
For example, if a seller fills the heating oil tank just before the closing, you’ll be required to reimburse the seller for the unused oil. This will happen at the closing table. Similar charges can be incurred if the seller has prepaid other utilities, such as water, sewer, or trash removal.
Still another expense that could require adjustment at closing are homeowners association fees. In many homeowners association neighborhoods, member fees are paid on an annual basis. If the seller has paid the fee for the full year, and you’re closing on the house on March 31—three months into the year—you will be required to reimburse the seller for nine months’ worth of fees. There may also be a fee to the HOA to get started. They may call it a transfer fee or something similar. Basically, it’s a lump sum upfront from the new homeowner to get into the HOA.
Sometimes, the person selling their West Chester or Liberty Township home for sale will “gift” the new buyers these utility adjustments. It’s always something to discuss with your Realtor.
Lender-Required “Cash Reserves”
This requirement really takes first-time homebuyers for surprise. It isn’t a closing cost, per se, but it’s still funds you need to have in the bank. In short, some lenders hedge against a buyer “closing broke” and ending up in default by requiring them to keep a certain amount of money on hand as a cash reserve. This ensures the borrower will be able to make their mortgage payments the first few months after purchasing the home.
The typical cash reserve requirement is two months. So, if your total monthly mortgage payment (including taxes and insurance) comes to $1,400 per month, you’ll need to have an additional $2,800 liquid in your bank account to satisfy this requirement.
Buying a Home is Expensive!
Yes, it sure is! The best thing is for prospective homebuyers to be well-informed and well-prepared by the time they set out to shop for West Chester and Liberty Township houses for sale. This helps avoid the sticker shock you might encounter after finding a home that you love only to end up scrambling to come up with the cash to afford all the closing costs.
When you’re ready to start looking for local real estate, give us a call! As the leading agents serving West Chester and Liberty Township, OH, we’d be happy to show you a range of properties for sale that fit within your budget.