How much cash will I need and when will I need it?

You’re ready to start looking for a home and enjoy the benefits of home ownership.  Making this commitment can be very exciting, but before you head out to look at homes, here are some thoughts about the amount of money you should have on hand before making that first offer.

As part of the offer to purchase, you will likely want to include some earnest money.  I’ll write a blog in the very near future with greater details on earnest money but for now, plan on providing earnest money in the amount close to 1% of the purchase price.  You will need to deposit this money into a separate escrow account within 2-5 business days of your offer being accepted by the seller.

Once your offer is accepted you will need to have funds available to pay for a home inspection.  This can cost anywhere from $400 to $800 depending on the size of the home.  This money will be paid directly to the home inspector at the time of the inspection, usually between 1-10 days after mutual acceptance of the offer.

Some lenders may require a deposit once the transaction has started.  For most lenders, this deposit will be used to pay for the appraisal.  Depending on the lender, the amount can be anywhere between $500-$1,000.  Some lenders may not collect this deposit, but some will.  If collected, it will usually be within 5-10 days of a mutually accepted offer.

Closing costs are fees associated with buying a home.  These include origination fees from the lender, title and escrow fees and county recording fees.  The total amount of these fees is usually between 2-3% of the home purchase price.  As part of the offer, the buyer can ask the seller to pay some, all or none of these closing costs, but this will need to be negotiated and decided as part of the initial offer.  If it is agreed that the seller will not contribute all the closing costs, the buyer will need to provide the remaining amount.  This will be due usually within 1-3 days before the closing of the transaction.

If the buyer’s loan program requires a down payment, this will need to be provided by the buyer as well.  Most loan programs do not allow the seller to contribute toward the buyers down payment so all of it will need to come from the buyer.  This amount can range from 0 to 20+% of the purchase price, depending on the loan program.  These funds will need be provided to escrow within 1-3 days of closing the transaction.

The last “bucket” of money most new homeowners don’t often think about is a reserve fund.  This is liquid cash a buyer should have in savings on the day of closing the home purchase.  These funds would be used for repairs that inevitably are needed within days, weeks or months of moving into the new home.

I would highly recommend setting aside these funds to be used for only repairs.  It would be easy to use these funds for the purchase of furniture, new blinds and other things to make the home more personalized, but I’ve seen it all too often. These funds are spent to personalize the new home, then a sizable repair is needed, and the funds are gone.  This can turn the excitement and joy of the new home into stress and anxiety in a heartbeat.

Having some cash available for earnest money and inspections will be required, but having additional funds available, especially for those repairs that will likely come up, can make the experience of home ownership so much more enjoyable.