Good Faith Deposits, Inspections, & Downpayments...Oh My!

     Whew! Winter is in full swing here in Central Kentucky! We are sitting at a cold 19 degrees with a wind chill of 6 degrees, but WOW it's been a beautiful day! Blue skies and sunshine. If it must be winter, at least we have the reprieve of sunshine! And boy is the market still chugging along...even in the middle January. If you're thinking of moving, now is the time. Interest rates are dropping and as we approach spring your competition will be growing! In preparation for buying, let's look at some helpful guidelines and tips!

    Today, I'm going to take a look the breakdown of money that you, as a home buyer, will need as you head into the buying process. It can seem overwhelming when you're in the middle of it without a clear idea of what is going to happen. Being prepared will alleviate some of that stress. Knowledge is most certainly power. So,here we go!

   Typical Expenses Incurred During the Home Buying Process

1. Good Faith Deposit: A Good Faith Deposit (also known as Earnest Money) is the money that you, as a buyer, deposit into an escrow account when an offer to purchase is submitted to a seller. This money is deducted from your down payment at closing. This money is like a safety net for the seller accepting your offer. It shows them that you are serious and have some skin in the game, if you will. Typically, here in Central Kentucky, we expect at least $1,000. Of course, that amount can vary depending on the market conditions and the price of the home being purchased. 
2. Down Payment: One of the most commonly known expenses for a home buyer is the down payment. This amount can vary greatly from loan type to loan type. For example, a VA loan or a USDA (Rural Housing) loan is 100% financing. That means that you will not be required to put any money down. If you qualify for either of these loans, by all means, take advantage of them! Another common type of loan is the FHA loan with a typical down payment of 3.5%. Outside of these types of loans, the most common type of loan is a conventional loan. Depending on the program, the down payment can vary from 5%-20%. Lots of options out there. I highly recommend speaking to a mortgage professional to go over all your options for your particular situation and needs. 
3. Inspections: When buying a home, most folks (but not always, there are always exceptions) will request a complete home inspection, a pest inspection, and less commonly, a radon test. While all of these items are out-of-pocket costs for you prior to the closing, they are essential in protecting you and your asset as you enter into this purchase. A complete home inspection done by a licensed home inspector will vary by area and the size of the home. Here in Central Kentucky the average range is $300-$500. A pest inspection is another invaluable tool to measure the condition of your purchase. The average cost for this service is around $50. The current homeowner is responsible for any treatment or repair needed. And, lastly, is the radon test. This test will test for unhealthy levels of radon gas being emitted into the home. This isn't as common as the first two inspections, but it is always an option. I urge my home buying clients to educate themselves on radon and make an informed decision. The cost of a radon test is around $150 in our area. Again, that can vary by area and vendor. 
4. Closing Costs & Prepaids: There seems to be a common misconception that closing costs and down payments are one in the same. That is simply incorrect. Let me clarify what closing costs and prepaids actually are and how much you can plan to budget for these costs. The typical amount needed to cover this cost is between 3-4% of the purchase price of your new home. This amount will cover everything from preparation fees to attorney fees to taxes and insurance. Unless you can negotiate these to be paid by the seller at closing, then this is an additional amount that needs to be prepared for. Also keep mind, if you do choose to ask the seller to pay these fees, you are taking away some of your negotiating power. It is definitely something to be considered. 
5. Other Items to Consider: Other items to consider and to plan for are incidentals for after your closing such as: movers, furniture, and utility deposits. 

   So there you go! This is a good guideline to go by when saving and planning your future home purchase. You do not want to find your self overstretched financially due to the unexpected. I highly recommend connecting with a local mortgage professional who can guide you through the preapproval process and give you up-to-date information on current products that are available in your area. Your Realtor will be able to provide you with contact information on professionals. Don't have a Realtor, yet? Give me a call! I'd love to help you get started!

Have a great evening,

Melissa