Upfront costs are one of the biggest barriers to buying a home. Many people believe they need tens of thousands of dollars to make a purchase when much more affordable options may exist. Here’s an idea of just how much money you need to buy a home.

Standard Upfront Costs

The upfront costs of buying a home fall into two categories: the down payment and the closing costs.

Your down payment is the portion of the home’s purchase price you pay up front. To qualify for a mortgage to finance your purchase, your lender will typically require a specific minimum down payment amount. Traditionally, many people paid 20% down on their mortgages, which would be $50,000 on a $250,000 home.

Your closing costs are the fees you pay at the closing of your home purchase transaction. Your exact costs will vary based on the location, property type and loan for your purchase. Typically, you can expect to pay 2% to 5% of the home’s purchase price in closing costs. For example, paying 3.5% on a $250,000 home would be $8,750.

Reduced Upfront Costs

If the numbers above sound too steep, there’s good news. Many mortgage lenders, government institutions and home sellers agree. As a result, numerous alternatives to paying those full upfront costs have been created. Here are the major ones:

  • Down payment assistance (DPA): Through your lender, you may qualify for a down payment assistance program that will provide funds to cover some or all of your down payment and closing costs. You may need to repay these funds (similar to your monthly mortgage payment), or the debt may be forgiven if you meet certain requirements, such as living in your home for a specific number of years.
  • Lender-paid closing costs: An alternative to paying your upfront closing costs may be to have your lender pay them instead. In return, you will typically accept a higher monthly mortgage payment.
  • Gift funds: This is money that is typically gifted to you by family for your home purchase. While this practice isn’t allowed on all mortgages, it can be a valuable way to help cover your down payment or closing costs.
  • Seller credit: You may be able to negotiate with the home seller to receive money toward your closing costs, but they will typically expect you to accept a higher sale price in return.

By taking advantage of one or more of these options, you may be able to dramatically reduce the amount of cash you need to buy a home.

While there is no magic formula to tell you your exact upfront costs before you select a home and a loan, we as mortgage professionals can help create an estimate for you. If you’re interested in buying a home, get in touch for your free mortgage consultation or preapproval.

Programs included on this document are subject to approval based on individual program guidelines, regional availability and borrower’s credit and underwriting approval. Contact your Draper and Kramer Mortgage Corp. professional for full program details.