The Cash You Need to Buy a Home

February 26, 2010

(…and When You’ll Need it)

Mortgages seem to get all the press when it comes to the financial side of buying a home, so I thought it might be useful to address the murkier topic of cash. We all know we need a bunch of it, but exactly how much and at what stage in the process? Following is my attempt at an answer:

You’ll first reach for your checkbook when you make an offer, which is typically accompanied by $1000 in earnest money. The check will be returned if your offer is not accepted; if it IS accepted, it will be held in escrow. (This just means that the money is held in trust by a third party until some condition is met — in this case, until the seller accepts your offer.)

The next outlay will be for your home inspection, which in our area is typically around $450 for a condo or $600 for a single family. If you opt for a lead paint or other specialized inspection, plan on spending more.

Assuming the inspection results don’t scare you off, you will move on to the “Purchase & Sale” (essentially the second contract, the offer being the first), where you’ll generally put down 5% of the total sale price, minus the $1000 you’ve already paid with your offer. All this money lives in escrow until settlement (a.k.a., “closing”).

In order to close, you need to prove that you have hazard insurance for your new home. If you’re buying a condo and the master policy coverage is “all in,” you may be all set. But if the condo policy only covers “to the studs,” or if you’re buying a single-family home, you’ll need to obtain your own policy. For this, you’ll be pre-paying the first year’s premium — costs can vary widely here — and putting an additional two months’ payment into escrow.

At settlement, you’ll pay closing costs, any “points” you’re purchasing, and whatever downpayment amount you’ve decided on (deducting out the amounts previously paid with the offer and P&S). Closing costs are generally in the range of $5,000 – $6,000 and include your credit report, appraisal, title search and insurance, attorney’s fees, a veritable buffet of processing, recording and transacting fees, and a portion of your taxes and PMI to be put into escrow. Your lender will provide you with an itemization of these charges and any other adjustments, on an HUD-1 form in advance of the closing, so that you can obtain the required cashier’s check. However, you should also have your personal checkbook on hand for any last minute adjustments that may be made.

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