Are you considering buying your first house? You are probably wondering how much money you will need to bring to the table.
While, each mortgage program is different and the money you will need also depends on the house you buy, I can break things down for you to give you an idea.
In most cases, there are three major expenses that you will need to include in your calculations: Earnest money, down payment, and closing costs.
What is Earnest money? It's in the name. Earnest money is money is a way a buyer can show their good faith to the seller. The funds can help separate your offer from the rest.
Before we get too deep in to the benefits of the earnest money deposit, it's important to understand that if a buyer fulfills their end of the contract, the earnest money goes back to them at closing. This money usually goes towards closing costs and/or the down payment.
Benefits for the Buyer
When making an offer on a house that has other interested parties, a sold earnest money deposit can separate you from the rest as long as it's paired with a competitive offer.
Similarly, when making an offer on a house with no competition, a significant earnest money check can set the stage for a cooperative seller. The earnest money check shows the seller that the buyer is serious about the house. Furthermore, it can help win more concessions from the seller further down the road.
Benefits for the Seller
Effectively, earnest money makes the buyer "put their money where their mouth is." Without this money on the table, buyers would be more likely to loose interest and simply walk away from the contract at a whim.
Keep in mind that their are built in ways for the buyer to leave the contract without sacrificing their earnest money deposit; a few ways include: an appraisal for less than purchase price, inability to secure financing, and inability to negotiate the home inspection.
How Much Should I Put Down?
There are no official guidelines or laws for the amount of earnest money. Speak with your Realtor about what is common in your area. Around the Harrisonburg/Rockingham area, $500-$2,000 is fairly standard. Other rules of thumb are 1%-3% of the contract price. In some more competitive areas, earnest money can be even be higher.
Protecting your Earnest Money
When providing earnest money, it is best practices to not pay cash. Make sure that the check will be held in an Escrow account until settlement.
Discuss contingencies with your realtor to ensure your money is protected in the contract.
The down payment really depends on the type of mortgage you go with. This is best explained in detail by a mortgage adviser, contact me for my recommendations.
You may have heard about paying 20% for a down payment. The reason this is common is because that is what most lenders require without paying Private Mortgage Insurance (PMI). The lender will make you pay this insurance to make up for the lack of collateral or equity in the house. For more information on PMI, click here.
There are a few other programs that allow you to pay less down. In higher populated areas, such as Harrisonburg, you can pay as little as 3.5% down with a FHA mortgage. In less populated areas (everywhere in Rockingham accept Harrisonburg city limits), you can get a USDA loan that is 100% financing.
Again, closing costs can vary. In Virginia, the Realtor fees are paid by the seller. The buyer is responsible for paying the costs associated with processing the paperwork. This can be around 3-4% of the purchase price. However, talk to a mortgage adviser for a better estimate given your price range.
Buyers commonly ask for sellers to cover closing costs as part of the negotiation. Just keep in mind that it affects the sellers net. In other words, if you offer $200,000 with up to $6,000 in closing costs, you are really offering $194,000.
As you can see, I have outlined how you can buy a home with no money down. This can be an excellent path people to get into their first home. Of course, the more money you put down the less your monthly payments will be.
Contact me for more information: (540) 246-9067