Saving for a home can feel intimidating, especially when you are not sure how much money you need or which costs to include. Before you set a savings goal, get clear on what you are saving for.
Start with three items: your down payment, closing costs and a possible earnest money deposit. Understanding what each one does, and how they fit together, can help take some of the fear out of preparing your budget.
You do not have to sort through the details alone. Trusted real estate professionals can help you plan your finances, understand your options and prepare for the costs involved in buying a home.
1. Start With Your Down Payment
Your down payment is probably the first thing that comes to mind when you think about saving for a home. The question is not simply how much you can save. It is how much you will need for the loan and purchase you are considering.
A common misconception is that you must put 20% down to buy a home. A 20% down payment is not always required. Each buyer's situation is different, so do not build your entire savings plan around that assumption.
The Mortgage Reports explains that the idea of a required 20% down payment is a myth. The right amount depends on your current savings and your homebuying goals.
That makes your down payment a conversation to have, not a number to guess. Work with a trusted professional to review loan types, down payment assistance programs and the requirements for each option.
Questions to Ask About Your Down Payment
- Which loan types should we review for my situation?
- What down payment does each option require?
- Which down payment assistance programs should we explore, and what are their requirements?
- How do my current savings and homebuying goals fit with these options?
The point is to replace a broad assumption with information that applies to you. Once you understand the requirements of the options you are considering, you can plan around those requirements rather than a number you have heard you must reach.
2. Include Closing Costs in Your Budget
Your down payment is not the only item to prepare for. You also need to budget for closing costs.
Closing costs are the collection of fees and payments made to the various people involved in your transaction. Bankrate describes them as the fees paid when finalizing a real estate transaction, whether you are buying a home or refinancing a mortgage.
According to Bankrate, closing costs can amount to 2% to 5% of the mortgage. That range is a reason to include them in your planning, not to focus only on the down payment.
For your own purchase, work with a trusted lender to understand what you will need at the closing table. Ask questions until you understand what the costs represent and how they fit into your overall budget.
Questions to Ask Your Lender
- What closing costs should I plan for with the mortgage we are discussing?
- Which fees and payments are included?
- What should I budget for closing costs in addition to my down payment?
- What do I need to understand about the money required at closing?
Keep your down payment and closing costs as separate items in your planning notes. Then review them together with your lender. The goal is to understand the whole picture, rather than save toward one item while leaving another out.
3. Understand the Earnest Money Deposit
You may also want to prepare for an earnest money deposit, sometimes called an EMD. This is money you pay as a show of good faith when you make an offer on a house.
The deposit shows the seller that you are committed and serious about the purchase. According to realtor.com, it is usually between 1% and 2% of the total home price.
Here is the important distinction: earnest money works like a credit toward your purchase costs. It is not an added expense on top of those costs. You are using part of the money you have already saved to pay a portion upfront.
How Earnest Money Fits With Your Other Costs
Realtor.com explains that, assuming everything goes well and the seller accepts the buyer's good-faith offer, the earnest money funds go toward the down payment and closing costs.
In other words, do not think of earnest money as a separate purchase cost that gets added again to your down payment and closing costs. Think of it as part of those funds paid earlier in the process, under the circumstances described above.
An earnest money deposit is not required, and it does not guarantee that a seller will accept your offer. Work with a real estate advisor to understand what makes sense for your situation and any specific requirements in your area.
Ask whether an earnest money deposit makes sense for the offer you are considering, what amount to plan for and how it would be applied toward your purchase. Your advisor can help you decide how to approach this part of the homebuying process.
Put the Pieces Into One Savings Plan
You do not need to have every answer before asking for help. Start by writing down what you have saved and what you want to accomplish with your home purchase. Then organize your questions around the three items covered here.
- Review your down payment options. Ask about loan types, assistance programs and their requirements.
- Discuss closing costs with your lender. Make sure these fees and payments are included in your budget.
- Talk through earnest money with your real estate advisor. Understand its role without counting it as an additional purchase expense.
Budgeting for a home does not have to be scary. Your next step is to bring your savings picture and these questions to a conversation. Reach out to Ed Parcaut to review your mortgage questions and start preparing a budget around your homebuying goals.
