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Purchasing a Home: The Down Payment

Many first time home buyers don’t understand that purchasing a home costs money.  I frequently hear “I want to buy a home, what do you mean I have to put money down?”  There are some mortgage programs that require little to no money down and depending on where you live there might be a program that offers down payment assistance.  However, when you purchase a home there are some costs associated with the transaction that cannot be financed.  Let’s discuss some of the costs associated with purchasing a home.

First, is the earnest money deposit.  When you make an offer to purchase a home the earnest money is a deposit the purchaser puts down to show the seller of the home that you are committed to purchasing the home.  How much earnest money deposited varies depending on the real estate market.  In a slow market it could be as little as $500.00, in a busy market where houses are selling quickly it could be as much as 3% of the purchase price.  Generally, the earnest money deposit is held in an escrow account and is applied towards the down payment and closing costs.

Then there is the home inspection.  Once the purchase and sales agreement is signed the buyer has approximately 15 days to have a home inspection conducted.  A home inspection is a comprehensive inspection of the structural and electrical conditions of the home.  Every home buyer should have a home inspection conducted by a licensed and certified inspector on the home they are purchasing for their protection.  The cost of a home inspection varies depending on the size of the home and what inspections are performed.  The home inspector evaluates the condition of the structure, construction and mechanical systems; identifies if anything needs to be repaired or replaced; and estimates the remaining life of the major systems, structure, and equipment.  Information gathered during the home inspection allows the buyer to ask for repairs to be done if something is broken, plan for repairs and maintenance, or potentially back out of the deal if unsatisfactory.

Finally, there are closing costs.  When purchasing a home there are fees associated with the transaction that are paid at the closing of the real estate transaction.  Closing costs may include appraisal fees, title insurance, surveys, and prepaid costs such as property taxes and homeowners insurance.  How much is paid in closing costs varies, but is generally between 3% and 6% of the purchase price.

Ultimately, purchasing a home is a long-term financial commitment that begins the minute the purchase offer is signed.

2 Comments on “Purchasing a Home: The Down Payment

  1. In addition to the downpayment, total out-of-pocket costs to buy a home can easily run 6% to 8% of the purchase price, factoring in things like prepaying for a homeowners insurance policy and funding escrow accounts for taxes and more.

    That said, there are state-backed programs that can provide assistance to potential homebuyers with downpayment and funds for closing costs. These typically come in the form of low- or no-interest second mortgage loans but sometimes in the form of outright, no repayment grants, and may cover some or all of the up-front costs needed to purchase a home.

    Regardless, good financial habits are key to successful homeownership. The ability to save, budget and plan for future expenses are needed skills, and the homebuyer education courses that often accompany these offers are a great place to start.

    • Absolutely! Programs to assist with down payment and closing costs vary depending on where the person is looking to purchase. Potential home owners can contact the housing services agency to learn what programs might be available.