Series - The Home Buying Process Part 3
What should your budget look like when purchasing a home?
Ugh! I know more talk about money. Yes! Because a home is usually the most expensive asset a person owns. The more you know, the more informed and prepared you will be when you buy your home.
Following up from the last post, you will want to start getting yourself mentally prepared for the budgeting items that come along with your home purchase ... Let's review those now!
1. The first time that money is going to come out of your account towards your new home will be your Escrow Deposit (a.k.a Earnest Money).
This is a portion of your overall down payment that gets paid at the time of signing the contract that will be held until closing day. These funds, often called, "skin in the game" is a sort of deposit on the house. Generally, you will put about 1-3% of the purchase price down as escrow. For example, if you are buying a $250,000 house, you can put down $2,500 in escrow (which is 1%). This is not EXTRA money or fees. If your total down payment is going to be $10,000 on a house, and you have already put $2,500 down in escrow, you will simply bring the remaining $7,500 to closing.
2. The second time that money is going to come out of your account will be to pay for the Home Inspection.
The Home Inspection is a day that will uncover everything that could potentially be considered a defect in the house. I'm not an inspector, you are not an inspector ... so we should not be expected to make a complete assessment of a property after touring it only once! We will meet the home inspector at the property and they will assess every inch of the house. Roof, foundation, windows/doors, electrical, plumbing, exterior, interior and more. The inspector will generate a full report with pictures and descriptions which we will use to negotiate repairs (more on this in a later post).
In most purchase agreements, there is a clause that states you will get the earnest money back if the home doesn’t meet your approval of the home inspection. In which you must terminate the deal completely. If you approve of the inspection, the bank will request an Appraisal of the home. The appraisal determines how much the home is worth - the bank will not loan you more than the value of the home. The cost of the appraisal is part of the closing costs and can run about $300 - $500 depending on the size of the home.
3. The final payment you will make will be the Down Payment and Closing Costs when you actually go to settlement (a.k.a closing day) and take possession of the home. Next post, I'll go over these two payments in detail because it's the largest payment and often times the most confusing!
Until next time!