When it comes to buying a home, it can feel a bit intimidating to know how much you need to save and where to find that information. But you should know, you’re not expected to have all the answers yourself. There are many trusted professionals who can help you understand your finances and what you’ll need to budget for throughout the process.
To get you started, here are a few things experts say you should plan for along the way.
1. Down Payment
As you set your savings goal for your purchase, your down payment is likely already top of mind. And, like many other people, you may believe you need to set aside 20% of the home’s purchase price for that down payment – but that’s not always the case. The National Association of Realtors (NAR) says:
“One of the biggest misconceptions among housing consumers is what the typical down payment is and what amount is needed to enter homeownership. Having this knowledge is critical to know what to save . . .”
The good news is, you may be able to put as little as 3.5% (or even 0%) down in some situations. To understand your options, partner with a trusted professional who can go over the various loan types, down payment assistance programs, and what each one requires.
2. Due Diligence Deposit
In North Carolina, due diligence money is a fee that is paid directly to the seller in a real estate transaction and is due immediately though sometimes it is paid a few hours after the execution of the contract. This is not a set fee, but rather one that is decided upon with guidance from your real estate agent based on the number of funds you have readily available. In today’s market, typically, the amount ranges anywhere from five to ten percent of the offer price of a home.
Sometimes you may hear someone refer to this fee as “good faith” money, as it is a fee that you are giving the buyer directly to let them know that you are serious about buying the property. It can also be thought of as a down payment towards the purchase price of the home, as the due diligence money will be credited back to the buyer at closing. Due diligence fees are most frequently paid in the form of a wire transfer or personal check. Your real estate agent will be the one to pick up the check from you and deliver it to the listing agent, who will then pass it along to the seller.
It is important to note that due diligence fees are non-refundable, assuming that the seller follows through with their promises in the contract. If a buyer decides to terminate the contract, they will forfeit this money. Once given to the seller, the money is deposited and will not be returned. If a buyer refuses to hand over the due diligence fee because they no longer want to buy the home, the seller can seek legal action against them to collect the funds.
In the rare instance that a seller is unable to hold up their end of the contract, the money can be refunded to the buyer, but this is extremely uncommon. When this situation does occur, it is usually due to extenuating circumstances such as the property being destroyed before closing or a title issue being revealed that cannot be resolved before closing.
With the acceptance of your due diligence fee, you then enter into what is referred to as the due diligence period, where the house is officially taken off the market before closing. This is an amount of time agreed upon between the buyer and the seller but typically ranges from fourteen to twenty-one days. During this time, there are many things that a buyer needs to accomplish such as inspections, appraisals, securing their financing, and title searches. Essentially, due diligence fees pay for the amount of time it takes to complete these tasks.
3. Earnest Money Deposit
Another item you may want to plan for is an earnest money deposit. While it isn’t required, it’s common in today’s highly competitive market because it can help your offer stand out in a bidding war.
So, what is it? It’s money you pay as a show of good faith when you make an offer on a house. This deposit works like a credit. You’re using some of the money you already saved for your purchase to show the seller you’re committed and serious about their house. It’s not an added expense, it’s just paying some of that up front. First American explains what it is and how it works:
“The deposit made from the buyer to the seller when submitting an offer. This deposit is typically held in trust by a third party and is intended to show the seller you are serious about purchasing their home. Upon closing the money will generally be applied to your down payment or closing costs.”
“The amount you’ll deposit as earnest money will depend on factors such as policies and limitations in your state, the current market, what your real estate agent recommends, and what the seller requires. On average, however, you can expect to hand over 1% to 2% of the total home purchase price.”
Work with a real estate advisor to understand any requirements in your local area and what they’ve recommended for other buyers in your market. They’ll help you determine if it’s something that could be a useful option for you.
If you decide you no longer wish to purchase the home before the end of your due diligence period, you will receive a full refund of your earnest money. If you decide to withdraw your offer after the due diligence period has passed, this is the only time the earnest money will not be refunded to you. It’s important to note the difference as the due diligence period is an important timeframe.
4. Closing Costs
“The upfront fees charged in connection with a mortgage loan transaction. …generally including, but not limited to a loan origination fee, title examination and insurance, survey, attorney’s fee, and prepaid items, such as escrow deposits for taxes and insurance.”
Basically, your closing costs cover the fees for various people and services involved in your transaction. NAR has this to say about how much to budget for:
“A home costs more than just the sale price. For example, closing costs—which make up about 2% to 5% of the home’s purchase price—are a major added expense…Lenders provide a Closing Disclosure at least three business days prior to closing on a mortgage. But buyers will need to budget for these added costs ahead of time to avoid sticker shock days before closing.”
The key takeaway is savvy buyers plan ahead for these expenses so they can come into the process prepared. Freddie Mac sums it up like this:
“If you’re in the market to buy a home, your down payment is probably top of mind. And rightly so – it’s likely the biggest cost of homebuying. However, it is not the only cost and it’s critical you understand all your expenses before diving in. The more prepared you are for your down payment, closing and other costs, the smoother your homebuying journey will be.”
Knowing what to budget for in the homebuying process is essential. To make sure you understand these and any other expenses that may come up, let’s connect so you have reliable expertise on what to expect when you buy a home.