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8915 S Keystone Ave Ste C
Indianapolis, IN 46227

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317-657-8059

I want to buy a house, how much cash do I need?

When you are buying a home, how much cash you need to have on hand depends on multiple factors. Some of those are the type of financing you plan to use, how thoroughly you want to check out the house before purchasing it, how much of a down payment you want to make, how much of the closing costs you will pay versus negotiating for the seller to pay them, and most importantly what types of lovely gifts you want to buy for your realtor.

Seriously, this question runs much deeper than tossing out a number. So what I am going to do is run us quickly over the buying process and let you know each point that someone will reach into your pocket. Then at the end we will give an estimated tally.

Step One: Buyers consultation with your real estate agent. This is the cheapest day in the process. You will bear no expense beyond getting there. Chances are you will come out with a free drink or two, and maybe a snack of some sort.

Step Two: Getting a loan preapproved. Some banks will charge up front for this. Most will not. If they charge, leave and go to another one. This part shouldn’t cost anything now. It will be included in your financing package at the end.

Step Three: The home search. This also should not cost you anything other than getting from place to place. Some realtors will even drive you around if you like, so this shouldn’t cost anything either.

Step Four: Making an offer. The search paid off. You found a home you want inside your price range. Along with your offer there will need to be an earnest money deposit made. This serves two purposes. First, it makes the signed purchase agreement legal. (At least in Indiana a contract must have an exchange of “consideration” to be binding). The second thing it does, is that it shows the seller that you are serious and have funds to complete the purchase. For the purposes of making the contract valid, as little as a single dollar would suffice. For the purpose of enticing the seller, I recommend a minimum of 1% of the purchase price and the more the better.

Step Five: Negotiating the final price. The actual negotiation is free, but it can cost you a lot at closing if you and your realty broker are not paying attention. When writing the residential real estate purchase agreement, and subsequent counter offers there are several issues that will require funding at closing. Some people will tell you that one person or another paying is standard…and they are mostly telling you the truth. The fact is that every single part of a real estate transaction is negotiable though. Some of the closing expenses negotiated at this part of the process include: surveys, home warranty, owners title insurance, lenders title insurance, and who pays what part of the pro rated property taxes. These expense vary depending on what company is used for each, and they will all be due at closing.

Step Six: The home inspection. Some financing requires it, some does not. I take the position that even if you are paying cash, you should always have at least a basic home inspection done. A quality inspector will save you from making the mistake of buying a property with hidden defects. The basic service runs from $300-$500 dollars. There are of course a plethora of add on inspections available. Some of them are: radon (which you should do if you have a basement especially), well tests, well and septic inspections, lead tests, soil tests and many others. All of them should be considered and you should select the tests that fit your needs. The inspector is paid by you, out of pocket when the service is performed.

Step Seven: The home appraisal. If you are being financed an appraisal is required. If you are paying cash, it is mildly recommended. Its always a  good idea to get a professional opinion on the price for a major purpose…but the market makes the price and in this situation it comes down to is the property worth x amount of dollars to YOU. The bank will insist on one to determine its value to them. The appraiser will charge between $400 and $700 and this service is also paid out of pocket at the time the service is performed.

Step Eight: The closing table. This is where the checkbooks really come out. The basic expenses of closing your home purchase can be broken down to finance charges, title fees, government recording fees, home owners insurance pre-payment, and property taxes. I will briefly go over each of them below.

  • Finance Charges.  Obviously these vary based on the type of loan and lending institution. In addition to that wide variance, just breaking one loan type from one lender could easily fill an article that would be longer than this one…so I am going to leave the details to your selected lender to explain.
  • Title Fees. The total of title fees can run up to 2 or 3 % of the purchase price, depending on when the last title work was done, who did it then and what company you are using now. The good news for you as the buyer is that only an estimated $300 of those fees will belong to you…unless you negotiated to pay them for the seller.
  • Government recording fees. These are made up of the fees that county clerks and attorneys charge to file all the legal documents involved in the sale of the home and the transfer of the deed. In most cases they should total less than $100.
  • Home owners insurance. Your first years prepayment will be made at closing. The amount will be negotiated between you and your insurer prior to closing being set.
  • Property taxes. All unpaid taxes must be paid at closing. There are a couple of methods for dividing up which party pays what. The short version is either the buyer pays them up to date, the seller pays them up to date or they are prorated.

That’s how much cash you need to buy a house. While I am sure this answer is not as clear as you were hoping, I hope this article illustrates why it is so hard to give a straight answer to this question.

On one hand if you are paying cash I can tell you directly that you need: 1% of the homes price for earnest, $500 for inspection, and roughly 3% for all closing costs. On the other, if you are finaincing there are just too many variables to estimate your cash need without knowing the specifics of the loan program and the lender.

The flip side of that is I work with lenders who are as serious about customer service as I am. When you do that preapproval, they will take the time to answer all of your questions and go over each and every line of your loan…not just to meet their RESPA requirements, but to make sure you understand the process and what it involves.

To get that level of service from the beginning to the end of your home purchase, call me at 317-657-8059 or email robb@yourrealtylink.com and become a lifelong client of mine.

You can also use my handy web form.

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