Buying a House: The Initial Costs, Explained

The initial costs

When you buy a house, there are two kinds of money to plan for. The first is the monthly payment, which most buyers think about carefully. The second is the cash you need before and at closing, and it surprises people far more often. It comes in three main buckets: the down payment, the closing costs and the prepaid items that fund your escrow account.

The good news is that none of them are fixed. The loan program you choose, the way you write your offer and the assistance you use can change each one dramatically. Knowing how they work is the first step to paying less.

Down payments

The down payment is the part of the purchase price you pay yourself instead of borrowing. Many buyers still believe they need 20%, but that has not been the rule for a long time. Some mortgage loans cover 100% of the cost of the home, including VA loans for eligible Veterans and USDA loans in eligible rural areas. Others, such as FHA, start at 3.5%.

Grant programs can also help with the down payment and other out-of-pocket expenses. Our IMS Homebuyer Grant Program offers grants of up to 5% of the purchase price, and the 1% Down Mortgage lets you put down 1% while the lender contributes 2%.

That said, a larger down payment still has real advantages. Any extra money you put down lowers your monthly payment and the total interest you pay, and over the life of a loan that can save thousands of dollars. The right amount is a balance between a comfortable payment and a healthy emergency fund after you move in.

Closing costs

Closing costs are the fees for the services needed to buy a house and make the loan. They generally range from 2% to 5% of the purchase price, and they fall into three categories.

• Lender fees. Charges for originating, processing and underwriting your loan, plus any discount points you choose to pay for a lower rate.
• Third-party fees. Services from companies other than the lender, such as the appraisal, title search and title insurance, credit report, survey and county recording.
• Prepaid funds. Money collected up front for property taxes, homeowners insurance and the interest between closing and your first payment.

Your exact closing costs vary based on several things: legal requirements in your state, the location and condition of the property, and which third-party services the transaction needs. A home that needs a well and septic inspection, for example, costs more to close than a city condo. Within about three business days of applying, your lender must give you a Loan Estimate that itemizes them.

Prepaids and escrow

Most lenders collect property taxes and homeowners insurance with your monthly payment and hold them in an escrow account, then pay the bills when they are due. To start that account, you typically prepay your first year of homeowners insurance and deposit a few months of property taxes at closing. You will also prepay interest for the days between closing and the end of that month. Closing late in the month keeps this number small.

An example budget

Here is how the upfront costs can look on a $200,000 home with an FHA loan, before and after common assistance. Every transaction is different, so treat this as an illustration.

How to lower what you bring to closing

You have more control over your upfront costs than most people realize. These are the levers we pull most often.

Every buyer's situation is different. The fastest way to know your real numbers is a short conversation. Call us at 319-377-1988 and we will estimate your total cash to close, and show you which programs shrink it the most.