There’s more to buying a home than taking on a monthly mortgage payment.(3 Buckets of Money)

Lisa Creed
Lisa Creed
Published on December 29, 2020

There are good reasons that homebuyers are counselled to see a lender early in the homebuying process. Yes, he or she will let you know if you qualify for a mortgage and, if you do, you’ll be given a preapproval letter to submit with an offer to purchase.

But, you’ll also find out how much you can borrow and how much you can afford to spend every month on your house payments.

That lender will expect to be paid for lending you money and will be paid, at closing. And, that’s just the beginning of the additional costs to buying a home that many homebuyers aren’t aware of. Let’s take a look at some of these so you aren’t caught unaware as you take on the process.

The 3 Buckets of Money 

We’ve found that many of our homebuying clients assume that the down payment on the loan is much larger than it might be and they also assume it is required upfront. 

In reality, the lender won’t ask for your down payment until later in the process, but  will want to see and document “seasoned funds,” meaning money that has been in an account for some time, typically 60 days or longer that is readily available to you when you close.

Your DOWN PAYMENT is what we call BUCKET # 1 of 3 that you will need to purchase a home. 

The 2nd BUCKET is for OTHER UPFRONT ITEMS  When you find a home that you want to purchase, the seller will expect the purchase agreement to be accompanied by what is known as an “earnest money deposit.” (Paid to the Title Company to hold in escrow until closing)  this is usually 1% of the purchase price.  Also, here in Texas we have an OPTION FEE.  This typically is $100- $300.  The option fee is paid direct to the seller (although you will have this credited back at closing) This gives you a certain number of days (usually 5-10 days) with the ‘option’ to back out of the contract for ANY reason or NO reason during this period.   You will want to schedule your inspections during this time in case there are repairs that need to be negotiated.  If the seller does not agree to your requests you can simply back out during the Option Period and get your Earnest Money back.  Timing is everything – and you need an experienced agent who watches all of the timelines and deadlines of the contract.
Other upfront items in the 2nd Bucket :

  • Inspection Fee (depending on size etc- average is $350-$500
  •   Appraisal Fee (typically $400-$600)

The 3rd BUCKET….

As mentioned earlier,  the lender will expect you to pay your down payment and other closing costs at the time of CLOSING. Which you may wire to the Title Company or bring a Cashiers Check to closing.  That amount of course depends on the price of the home and the type of loan you’ve acquired. The total amount of Down Payment and Closing Costs are called your “TOTAL CASH TO CLOSE”. 

Conventional lenders typically require 20 percent of the loan amount while FHA-backed loans offer several different down payment options, depending on the borrower’s credit score. There are now Conventional programs that only require 5 or 7 % down.  

The VA loan, specific to military members and their widows or widowers, offer ZERO down payment loans while Fannie Mae and Freddie Mac, offer several different programs. Not ALL VA programs are created equal. Our preferred partners are specialists in finding the most economic VA programs for you.  You can also explore other FHA programs, Down Payment Assistance and talk with them about what works best for you.
(PRO TIP – Try our calculators at the bottom of the page to see examples)

Shortly after applying for a mortgage, your lender will supply you with a Loan Estimate, which will give you a general idea of what to you’ll pay in CLOSING COSTS – which remember, is seperate from Down Payment and is your 3rd BUCKET of Money needed.  Keep in mind that some of your upfront fees such as your Earnest and Option Money will be credited back to you at close which will reduce the total of closings costs.

These numbers, by the way, are estimates. The Closing Disclosure that you’ll receive shortly before closing is the final statement of the terms of your loan and how much you’ll need to pay in closing costs.

In general, closing costs typically equal between 3 percent and 5 percent of the loan amount.   It’s a good idea to remember the 3 different BUCKETS when planning the total cost so you are not surprised. Any good lender will also consult you ahead of time on what to expect.

We are happy to answer any questions you may have about the closing process. Or, you can always contact our Preferred Lender or view the information available online at the Consumer Financial Protection Bureau’s website.

Welcome to Home Ownership!

 Instead of paying rent every month, you’ll be paying your mortgage payment. This payment is divided up to pay portions of the loan’s principal, interest, taxes and homeowner insurance.

The cost of mortgage insurance will be taken out of your monthly house payment as well, if you paid less than 20 percent down.

If your home is in a community managed by a homeowner association, you’ll also pay fees or dues and, possibly, assessments. Dues are commonly paid on a semi-annual basis but some HOAs require monthly or quarterly payments.

In our experience,  most agents don’t spend enough time walking through the entire home buying process with their clients. There is alot of important information they need to make smart decisions – and be fully prepared.

Ready to get the process started?

Try our Affordability  or Mortgage Calculator


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