Out-of-Pocket Costs
Renters Wanted to Know…
Not too long ago I posted to my stories asking Denver renters what they wanted to know most when it came to purchasing a home. I was very surprised by the response. Most (if not all) responses pertained to out-of-pocket costs. What are these and why do they matter? These are the costs that arise during the purchasing process. It comes up in every conversation I have with renters, so don’t feel left out if you’ve also questioned what these are. I’m here to take you through them, so let’s get into it…
Down Payment
The number one question I hear when having these conversations is “Do I really need 20% down?” The short answer is “No”. Here’s the long answer…
While you only really need 3% down in order to submit offers, the more you’re able to allocate towards your down payment the better. There are some pretty substantial benefits of having more than the minimum required down payment:
Smaller mortgage payment. If you borrow less you pay less. If you put at least 20% down, you can avoid PMI which can make a considerable difference in your monthly payment.
More equity in your property
Better interest rates
Stronger your offer
Why does this make your offer stronger? Price is not the only consideration for the seller.
If two seemingly identical offers are submitted and the only difference is that one is has minimum 3% down payment while the other has 20%, the 20% is likely going to be chosen. This is because that seller knows that should there be unexpected costs that arise from the time of offer acceptance to closing on the property, the buyer with the extra money down can pull from their savings to ensure the deal closes. The more reserves the better, but that doesn’t mean that 3% down offers aren’t being accepted, because it does happen.
I’m going to use my last client’s purchase of a $250,000 condo as an example to put things into perspective. To simplify the numbers the minimum 3% down payment of a condo in this price point is $7,500.
Down Payment Assistance
There are numerous down payment assistance programs that you can apply for. If you qualify, some are issued as forgivable grants while others are issued interest free. They are all different, but know there are options for you depending on your individual situation. From my experience with clients, they are usually based on your income. This is a great way to get your foot in the door and make room to save so that you can have a higher down payment. In the example I’m using, my last client received 4% down payment assistance in the amount of $10,000 (via CHFA).
Earnest Money
Earnest money is put down before closing on a property to show your seriousness about the transaction. It's also known as a good faith deposit and goes towards the purchase of a home. When viewing properties, you’ll know ahead of time what the minimum required earnest money is from the MLS listing (your agent can advise on this). Is it typically due a few days after your offer is accepted, so this is something that you should have in the bank ready to go as either a wire or personal check. For condos in $250k price range, it’s usually around $2,500.
Note: In today’s market, you’ll hear terms like “hard earnest money” thrown around when discussing offers. Earnest money is usually returned to the buyer should something happen before closing (ie, financing falling through or an inspection resolution not being able to be met). Buyers are offering pay a non-refundable deposit (aka “hard earnest money”) to sweeten up their offers. They are usually getting an inspection and knocking out due diligence items in the first few days after going under contract and then paying this. Read here for more info.
Due Diligence Costs
After you submit the earnest money to the title company, there is a period of time before you end up at the closing table where you need to consider a few other out-of-pocket costs. The most common is the inspection. These can range from $250-600 depending on the property. If you need any special inspections such as sewer scopes or structural engineer opinions, these can be a few hundred dollars each. My last client who purchased the $250,000 condo paid $300 for her inspection and that was all that was needed in the transaction.
HOA Fees
The other out-of-pocket cost to consider when looking at homes is the monthly HOA. These are the homeowner’s association fees that are paid in addition to your monthly mortgage payment. In Denver, they typically range anywhere from $200-$400 a month based on amenities and can of course be higher in more luxury communities. My last client closed on a condo that had a pool and their HOA fees are $300 a month. Her lender factored this in her monthly mortgage payment so that she knew what she’d be spending monthly.
Closing Costs
The last out-of-pocket cost that is very important and worth mentioning are closing costs. These are processing fees that you pay to your lender and title company when you close on your loan and are due at the time of closing. They include appraisal fees, insurance premiums, tax prorations, application fees and the like. Once you narrow your search to a specific price range or an exact property, your lender can provide you with something called a loan estimate which will give you a breakdown of these costs so that there are no surprises. In Denver, these typically range from 2-4% of the loan amount. My last client’s closing costs for the $250k property were $2,500.
Let’s sum it all up…
In the example provided, the buyer’s out-of-pocket costs for a $250,000 condo were $15,300. Because they received down payment assistance, they were really only $5,300. $2,800 was paid in the beginning of the transaction (earnest money and inspection) and the remaining $2,500 was due as closing 30 days later.
Down Payment: $10,000
Earnest Money: + $2,500
Inspection: + $300
Closing Costs: + $2,500
Total OOP Fees = $15,300
Less Down Payment Assistance (paid by CHFA) - $10,000
Adjusted OOP Fees with DPA = $5,300
Know that this is a very modest example, but shows what’s required to get into a property in that price range. Interested in seeing what closing costs would look like for a home within your budget? NerdWallet has a great closing cost estimator you can play around with to get an idea of total due. I suggest taking a look.
Have Questions?
Feel free to comment below or reach out to me directly with any questions or feedback. This was a very high-level review of out-of-pocket costs and I am more than happy to walk you through the purchasing process and talk in more detail. Managing expectations and providing you with the information you need in order to reach your goals is my specialty. No question is too small and I’d love to help. Contact me anytime!
Latest YouTube video associated with this blog post can be found below:
