3 Buckets to Fill When Buying A Home
Updated: Sep 15, 2021
When you are in the market to buy a new home one of the main questions is How Much Money Do I Need? Searching for the perfect home can be an exciting and daunting experience. It takes time and effort to scroll through countless homes that check some of the boxes but not all. You finally find the one you love! But can you afford it? (Nest Hint: At this stage, you should be pre-approved or pre-qualified )
In previous articles, I have touched on how to make a competitive offer. In a seller's market with low inventory, you have to be prepared from the gate in order for your offer to be accepted. Part of that preparation is knowing how much cash you will need on hand in order to make the deal close. There are three main buckets that you will need to have cash savings or assets available to ensure you prevail in the process from contract to close.
Bucket 1: Due Diligence & Earnest Money
When an Offer to Purchase agreement is signed by both the buyer and the seller the due diligence period begins. There are two fees due at this time the Due Diligence Fee and the Earnest Money Deposit. The due diligence fee is a non-refundable amount of money paid by the Buyer directly to the Seller. While the earnest money is a deposit of money made by a Buyer at the time of making an offer to demonstrate the earnest intent to purchase. This money is deposited into an escrow account and can be refunded. Both of these fees are credited to the buyer at closing.
Your real estate professional should be able to give you a range for the fee in your market. In the Charlotte market, the due diligence and earnest money are usually between 1%-3% of the offer price for the home. In a multiple offer situation, your Realtor may suggest a higher-end percentage to strengthen your offer and show the seller you are a serious buyer.
Consult with your real estate professional to determine the amounts that work best for your situation. Both the due diligence and earnest money are due when the seller signs the offer to purchase and must be paid within five days in most cases for the contract not to be voidable.
Bucket 2: Down Payment
The down payment is the difference between the loan amount and the purchase price. You must speak with your lender to get a complete understanding of what your Loan to Value Ratio (LTV) is. The loan to value ratio is the amount the lender is willing to lend toward the price of the home. Some first time home buyer programs have a 97% LTV ratio other conventional loan programs can see an 80% LTV. The remaining percentage whether it be 3% or 20 % of the home price, is the buyer's responsibility to pay. This percentage is considered your down payment.
It is important to speak with your lender regarding the loan programs you qualify for. There are first time home buyer programs that offer grants to assist with paying the down payment. Your real estate professional should be able to direct to you a lender that can assist you. As always if you are in the Carolinas I am available to help as well.
Bucket 3: Closing Costs
Closing costs are the expenses incurred in the purchase and sale of real estate. When you purchase a home there are processes and procedures that must take place to ensure the success of the transaction. Closing costs can be a number of things depending on the type of property you are purchasing. For the purpose of this article, we will are focused on a residential single-family home.
When an offer to purchase is accepted by the seller the buyer enters into the "Due Diligence Period". During this period of time, it is up to the buyer to consult with professionals to be sure the home they are purchasing is absent of material defects or other problems that were not foreseen at the time the offer was made. Professionals such as appraisers, surveyors, and inspectors will need to be contracted to deliver reports to the buyer to substantiate their desire to purchase to the lender. There are other closing costs to also consider such as home warranty, taxes, and insurance. Also included in the closing costs are the closing attorney fees which is also the responsibility of the buyer to pay. The closing costs are paid by the buyer unless a successful negotiation happens and the seller has agreed to contribute to some or all of the closing costs.
An estimated 1% of the home price should be budgeted for closing costs.
It is especially important that you budget for these three buckets when you are in the market to purchase a home. A great real estate agent will educate you on these costs well before an offer is made. If the costs are keeping you from homeownership and you have not owned a home in the last three years you could qualify for grants that assist with down payment and closing costs up to $17,500 for first time home buyers. If you are not already working with a Realtor contact me, I can show you how to access the grants helping with the down payment and closing costs. I am confident owning a home is in your near future!
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