The First Bucket is your down payment. Down Payments range from 3.5% for FHA financing to over 20% for Conventional. Your Down Payment includes the Earnest Money you put down when you make an offer and in the Atlanta market, Earnest Money is generally about 1% of the Purchase Price with resales.
The Second Bucket is the costs to create your new loan, insure your title and conduct the closing. These fees typically range from 2.5% to 3.0% of the loan amount and what many refer to as the “Closing Costs”.
The Third Bucket is for the escrow account if you are putting less than 20% down. These costs may be referred to as “Pre-Paid Items” and are intended to fund the account your lender will use to pay the property taxes and homeowner’s hazard insurance policy. These amounts are determined by the local municipality and your insurance company. However, the portion you will be charged in order to close is determined by your lender.
One option to conserve cash as a Buyer is to take some or all of the amounts in Buckets 2 and 3 and write into the contract that the Seller will be paying for these with a fixed dollar amount. That will minimize the amount you will need to close. Most Sellers will concentrate on the net sale price anyway so they are not really paying the “closing costs”. Building these costs into the contract is purely a cash management strategy because ultimately the loan amount is based on the full Purchase Price (meaning that if you are getting a 90% loan, you will be financing 90% of the closing costs because they are built into the price).
The Fourth Bucket is for inspection costs during Due Diligence. The amount and type of inspections are your choice and may depend on expected issues in the home you are considering. General Home Inspections typically run $400-$600 based on the size and price of the home. Radon Testing runs $175-$200. Property Surveys run $450 – $550. Termite Inspections range from FREE to $75.
Here is an example:
- Assume you are paying 10% down on $250,000 house = $25,000 Down Payment. Loan amount would be $225,000. Earnest Money would be $2500 – $3000 and is included in the total Down Payment.
- Estimated Closing Costs could range from $5600 to $6750
- Estimated Pre-Paid Escrow Items could range from $1575 to $2800
- Let’s just assume the Inspection Costs come in at $1000
In this example the total cash required would then range from $30,025 to $35,550. On conventional loans, the Seller contribution towards buyer closing costs is capped at 6% of the Purchase Price. In this example, the maximum would be $250,000 x .06 or $15,000. The total estimated closing costs and pre-paid items only comes up to around $9550. So, all of the closing costs and pre-paid items could be included in the deal if it could be negotiated. That only leaves the down payment and inspection costs OR about $26,000 in cash required to close.
Please note that this example is based on percentages seen in recent transactions. Some costs are fixed which means for lower loan amounts the percentages may be higher and for larger loan amounts the percentages may be lower. We always obtain real numbers for these calculations from our trusted lenders when working on offers to make sure there are no surprises.
