I need to bring how much to closing???…

That is way more than I expected!!… What happened?”

These are words that every real estate agent and lender never want to hear – We prefer NO SURPRISES! – Unless they are good 🙂

When you’re getting ready to close on your first home, hopefully this is something that you will NOT have to experience.

Purchasing your first home can be an overwhelming process

Understandably, because there are so many moving parts and things to consider. There are pre-approvals, offers, negotiations, appraisals, mortgage documentation, real estate documentation, and even more mortgage documentation – understatement these days.

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Amidst all the noise, stress, and confusion, the process can be simplified by knowing and understanding how the process as a whole will unfold. This is where your mortgage lender, real estate agent, and inspectors can really add value. 

I will let you in on a little secret…

The trick to simplifying the process is having complete clarity on the next steps and knowing what’s expected from you and from your group of professionals.

Oddly enough, sometimes the seemingly simple questions like, “how much do I need for my down payment?” or “how much cash will be due at closing?” are hard to answer because everyone’s situation is different.

Let’s try to get some clarity!

First things first

Before diving into the numbers, let’s pick a property for purposes of discussion.

Property (AKA your shiny new home): 123 Main St, Sacramento, CA  – this home is a ranch style, 3 bed / 2 bath, 1,537 sq ft home in a good school district – Perfect for a first time buyer).

Purchase Price: $346k – this happens to land right around median home price in Sacramento.

Ok, so we have a property in mind and we have a price in mind… now it’s time to work backwards to determine how much funds you will need available to close on your wonderful new home.

Determine your funds to close

The funds to close can be broken into two categories:

1. Down payment amount

2. Closing costs

Let’s look at each one individually starting with the down payment.

Down Payment

The down payment is the amount required by the lender to put towards the cost of the home. Assuming you are purchasing the home with a mortgage, the lender wants to know that you have a little skin in the game – so to speak.

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There are several down payment options available – yes, even down payment assistance programs which can dramatically lower your out of pocket costs. 

With that said, I am going to focus on what’s most common in the Sacramento market.

There are two programs that we see all the time… the first is a conventional loan with 3-5% down…. The second is an FHA loan requiring 3.5% down.

The down payment amount is specific to the mortgage you qualify for, your financial situation, and your goals…

So, for purpose of discussion, let’s go with one of the most common options…. The conventional loan with 5% down. This is common because of slightly lower interest rates and slightly lower mortgage insurance requirements – This is a good topic to discuss in detail with your lender. 

Ok already… how do we determine the down payment amount?

Very simple…

To Calculate the down payment – Take the purchase price (or estimated price) and multiply by the down payment percentage.

Example Down Payment: $346,000 (our sample property) x 5% (.05) = $17,300

Based on our sample property – $17,300 is required for the down payment. Feel free to adjust the purchase price and/or down payment percentage based on budget, purchase price, loan type.

Now, lets look at the closing costs.

Closing Costs

Outsider looking in… closings costs are confusing. There are lender charges, appraisals, inspections, title/escrow fees, prorated interest, taxes, insurance, recording fees….

MAKE IT STOP PLEASE!!

Even though the list of fees seems never ending… there is good news!

Estimating the total amount due at closing can be calculated using a fairly simple rule of thumb.

what-are-my-closing-cost

Rule of thumb: Plan on 2-3% of the purchase to be set aside for closing costs.

  • If the purchase price is lower than $300k, fees will likely be closer to 3% in relationship to the purchase price.
  • If the purchase price is higher than $300k, fees will likely be closer to 2% in relationship to the purchase price.

In our example, let’s split the difference and estimate 2.5% of the price.

Example Closing Costs: $346,000 (purchase price) x 2.5% (.0025) = $8,650 (estimated closing costs)

***Side note*** There are some creative ways to have the seller pay a portion of the closing costs and/or finance the fees so that you do not need to cover this cost completely out of pocket – this is a good discussion to have with your real estate agent and lender. 

Total funds to close

Now that we have reviewed how to calculate the down payment and the closing costs, lets add it up to determine the total amount of cash needed to close on your shiny new home in Sacramento 🙂

  • Down payment: $17,300 (5% of purchase price)
  • Closing costs: $8,650 (2.5% of purchase price)

Total funds to close: $17,300 + $8,650 = $25,950

Ok, so we know we need approx. $26k in order to close on your new home. However, we are not completely done just yet.

I always like to make sure my clients are prepared for some of the commonly overlooked expenses that are incurred after purchasing a home. Awareness is key!

Commonly overlooked expenses

The last thing to be aware of and plan for is the cost to move, redecorate, and possibly repair misc. items.

The reason these costs are overlooked is simply because they vary so greatly from situation to situation….

Happy couple in their new home concept

Here are a few possible expenses to consider that may help you avoid some surprises:

  • Cost of hiring movers – if they are needed ($500-$2,000)
  • Repairs – this could mean a remodel, it could be a leaking sink, or it could be a new HVAC system – Just depends on the home you purchased (A good real estate agent and home inspector will be able to help you ball park these costs).
  • Appliances – Do you need a new fridge? Washer, dryer, stove, etc? (estimated cost can be determined using a quick online search)
  • Window coverings (If needed)
  • New furniture – very common to want to redecorate and fill your shiny new home with some beautiful new furniture.
  • Last rent payment to landlord.
  • Reserves – always good to keep a little extra gas in the tank for the unexpected.

These costs obviously vary, but let’s just pretend like you have to budget for movers ($600), your last rent payment ($1,700), and new carpet ($2,200)…

Add these up and you have an extra $4,500 to budget for ($600 + $1,700 + $2,200 = $4,500)

Putting it all together

  • Down payment: $17,300 (5% of purchase price)
  • Closing costs: $8,650 (2.5% of purchase price)
  • Overlooked/Misc costs: $4,500 (Carpet, rent, and movers – again, this will vary)

Grand total: $30,450

Now you should have a better understanding of the cash required to close on a property and how to budget for the commonly overlooked expenses after closing.

Hope you found this useful, happy house hunting!

All the best!

 

Want to buy, sell, or invest in real estate?

Silva Realty Team can help!

We cover Sacramento & Placer County in California with a special focus on Roseville, Rocklin, Loomis, Penryn, Lincoln, Newcastle, Orangevale, & North Natomas (Sacramento).

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