What Upfront Costs Should I Expect When Buying My First Home?
Buying your first home is exciting, but the amount of cash you may need before and at closing can be confusing.
Upfront home-buying costs commonly include your down payment, earnest money deposit, inspection, appraisal, lender fees, closing costs, prepaid taxes, homeowners insurance and initial escrow funding.
In this guide, I, Mike Burton (NMLS# 3373), will explain which costs come up, when they are paid and how to prepare for them.
Key Takeaways
- Main Costs: Plan for a down payment, closing costs, prepaid expenses and property-related services.
- Timing: Some expenses are paid when you make an offer or apply for the loan, while the remaining funds are generally due at closing.
- Cash Needed: Your total depends on the price, loan program, property, insurance, taxes and negotiated seller credits.
- Planning: A detailed pre-approval and Loan Estimate can help you prepare before you make an offer.
Quick Answers
- How much cash will I need? It varies. Your down payment is only one part of the total, so I also estimate closing costs, prepaid expenses and reserves when required.
- Are closing costs the same as a down payment? No. The down payment reduces how much you borrow. Closing costs cover the loan and the legal and property services needed to complete the purchase.
- Is earnest money an extra cost? It is generally credited toward the amount you owe at closing, assuming the transaction is completed under the purchase agreement.
- Can a seller help with closing costs? Often, yes. Seller credits may be allowed, but the amount and permitted uses depend on the loan program, appraisal and contract.
Your Down Payment Is Only Part of the Upfront Cost
Many first-time buyers begin with one question. How much do I need for the down payment?
That is a good place to start, but it isn’t the full picture. You may also need money for the deposit, inspection, appraisal and closing expenses. Some of those funds are paid before closing. Others are collected when you sign the final documents.
Your down payment is the difference between the purchase price and the amount you finance, before considering other credits and adjustments. A larger down payment can reduce the loan amount, but it may not make sense to use all of your available cash. You may need funds after closing for moving, repairs or regular home expenses.
Some conventional and FHA programs may offer low down payment options, while eligible VA and USDA borrowers may qualify for financing without a down payment. Availability and requirements vary by lender and are subject to program rules, occupancy requirements and borrower eligibility. Consult a licensed mortgage professional about your specific scenario.
You can review low down payment purchase options and the first-time home buyer program overview for more information.
What Costs Are Paid Before Closing?
Not every cost waits until closing day. You may need to pay a few expenses while your purchase is being reviewed.
Earnest Money Deposit
Earnest money is a deposit submitted in connection with your offer or purchase agreement. In Massachusetts, the contract may include an initial deposit followed by an additional deposit when the Purchase and Sale Agreement is signed. The timing and amount are negotiated as part of the transaction.
Earnest money is generally held in escrow and later credited toward the cash you need at closing. It is not normally an added charge on top of the final amount. Your rights to a refund depend on the contract, deadlines and contingencies, so review the agreement with your attorney or real estate professional.
Home Inspection
A home inspection helps you learn about the property’s visible condition before closing. The inspector may review the structure, roof, plumbing, electrical systems, heating and other accessible areas.
An inspection is separate from an appraisal. It is commonly paid directly to the inspector and is generally not credited back at closing. Specialty inspections may also be considered based on the property. These may involve a septic system, well, pests, radon or other concerns.
Appraisal
The lender commonly orders an appraisal to obtain an independent opinion of the property’s market value and review basic property eligibility. The appraisal protects the lending decision. It is not a substitute for an inspection.
The appraisal cost varies by property type, location, complexity and timing. It is often paid before closing or collected after you indicate that you want to proceed with the loan.
Homes on Cape Cod, Nantucket or Martha’s Vineyard may require more research when comparable sales are limited or the property has unusual features. That can affect the appraisal timing and cost.
What Closing Costs Will Appear on the Loan Estimate?
After you apply and provide the required information, the lender generally issues a Loan Estimate. It shows the estimated loan terms, payment, closing costs and cash needed to close.
Ok, here is how the program works. Some charges are connected to the mortgage. Other charges come from third parties or from owning the property. I will go over both so you can see where the money is going.
| Cost Category | What It Covers | When It Is Usually Paid |
|---|---|---|
| Lender charges | Loan processing, underwriting or origination services, depending on the lender | Usually at closing |
| Appraisal and credit services | Property valuation and reports used in reviewing the application | Before closing or at closing |
| Attorney and title services | Title search, legal work, settlement and title insurance | Usually at closing |
| Government and recording charges | Recording the mortgage and other required documents | At closing |
| Prepaid expenses | Interest, homeowners insurance and property taxes due around closing | At or before closing |
| Initial escrow funding | Funds placed into an account for future tax and insurance bills | At closing, when applicable |
Some costs are controlled by the lender. Others are based on the service provider you select or the property itself. The Loan Estimate explains which services you may shop for.
Prepaid Expenses and Escrow Funding
Prepaid expenses can cause confusion because they are not all lender fees. They are often normal homeownership expenses collected in connection with the closing date.
Prepaid Interest
Mortgage interest is generally collected from the closing date through the end of that month. The amount changes based on the loan amount, interest rate and closing date.
Your first mortgage payment is commonly due after a full calendar month has passed. Your specific dates will be shown in the closing documents.
Homeowners Insurance
You will generally need an acceptable homeowners insurance policy before closing. The first premium is often paid before or at closing. The cost depends on the property, coverage, deductible, location and insurance company.
For a coastal property, insurance deserves an early conversation. Wind coverage, flood zones and property characteristics can affect cost and availability. I suggest getting quotes while the loan is being processed, not a few days before closing.
Property Taxes and Escrow Reserves
The closing figures may include property tax adjustments between you and the seller. The lender may also collect funds to start an escrow account for future taxes and insurance.
Escrow funding is money held for upcoming tax and insurance bills. It is different from a fee paid to the lender. The amount varies based on billing dates, the closing date and program requirements.
Mortgage Insurance and Program-Specific Charges
A low down payment can make a purchase possible with less cash, but there may be mortgage insurance or a program funding charge.
- Conventional loans: Private mortgage insurance may apply when the down payment is below the program’s threshold. The cost depends on several factors.
- FHA loans: FHA financing generally includes upfront and annual mortgage insurance. The upfront portion may often be financed, subject to current guidelines. You can read more about the FHA home loan.
- VA loans: Eligible borrowers may have a VA funding fee unless an exemption applies. The fee may often be financed. Review the VA purchase loan for a fuller program explanation.
This is 1 example, we have many options to choose from. The right comparison should look at your total cash needed, monthly payment and how much money you will still have after closing.
How Seller Credits Can Reduce Your Cash Needed
A seller credit is an amount the seller agrees to contribute toward eligible closing costs. It may help reduce the cash you bring to closing, but it does not usually replace the minimum required down payment.
Seller contribution limits vary by loan type, occupancy, down payment and other program rules. The property must also support the agreed purchase price through the appraisal.
There is another limitation. A credit generally cannot exceed the eligible closing expenses. If the credit is larger than the permitted costs, you may not receive the unused balance as cash.
A lender credit may also reduce closing costs in exchange for different loan pricing. I like to compare the short-term savings with the longer-term payment. There isn’t one answer that fits every buyer.
Costs That Can Be Different on Cape Cod
Buyers in Barnstable County, Plymouth County and other coastal parts of Massachusetts may have property-specific expenses that need attention early.
- Flood insurance, if required by the flood determination and loan guidelines
- Wind or coastal insurance considerations
- Septic system review or testing
- Private well testing
- Condominium document or questionnaire charges
- Survey, plot plan or additional title work
Not every property needs every item. The goal is to identify the likely costs before you make a final decision. A year-round home, second home, condominium and property near the water can each have a different cost structure.
How to Prepare Before Making an Offer
Start by separating your available funds into three groups:
- Deposit funds: Money needed under the offer and Purchase and Sale Agreement.
- Closing funds: Down payment, closing costs, prepaids and escrow funding, less allowed credits.
- Funds kept after closing: Money for moving, repairs, furnishings and required reserves.
Keep your funds in accounts that can be documented. Large or unusual deposits may need an explanation and supporting records. Avoid moving money between several accounts without keeping a clear paper trail.
Gift funds may be permitted under some programs, but the donor, transfer and documentation must meet the applicable guidelines. Borrower eligibility, property eligibility and documentation rules are separate parts of the approval process.
I can prepare an early estimate based on a sample purchase price. It will not be the final closing disclosure, but it can give you a working range. Fees, rates and requirements can change, so we will update the estimate when you have a property and accepted offer.
Let’s Review Your First-Home Budget
No worries if all of these items take some time to settle in. There are a lot of moving parts. I am happy to go over them again.
I have worked in the mortgage business for 40 years and I am licensed in Massachusetts and Florida. For buyers on Cape Cod, the Islands, the South Shore or in the Boston Area, I can help compare the down payment, estimated closing costs and monthly payment for several loan options.
Please call, text or email Slade Mortgage Group when you are ready. We can review your scenario, compare the options and put together a pre-approval plan. From there, you will have a clearer idea of the cash you may need and the next steps.
Frequently Asked Questions
Can I use gift funds for my upfront home-buying costs?
Many loan programs allow eligible gift funds for some or all of the down payment and closing costs. The source, donor relationship, transfer and required documentation vary by program, so review the plan before moving the money.
What happens to my costs if the appraisal is lower than the purchase price?
A low appraisal may affect the maximum loan amount and the cash needed to complete the purchase. The available choices depend on the contract, loan program and negotiations between the buyer and seller.
Is a home inspection required by the mortgage lender?
A general home inspection is often not a standard lender requirement, although certain property conditions or loan programs may require additional evaluations. An inspection is still separate from the appraisal and can provide useful information about the property.
When should I arrange homeowners insurance?
Begin collecting insurance quotes after your offer is accepted and before the closing date gets close. Starting early is helpful for coastal, older or unusual properties because coverage terms may take more time to review.
Do condominiums have additional upfront costs?
They may. Condominium purchases can involve association document fees, questionnaires, insurance reviews or assessments, depending on the property and loan program. These costs and the condominium's eligibility should be reviewed early.
This is educational and not financial advice. Loan programs and guidelines can change. Talk with a licensed mortgage professional about your specific scenario.
Mike Burton
Mike has over 33 years in the mortgage industry as a top originator for each institution he was employed with. Mike started Slade Mortgage Group in 1997 and formed a team of professionals to service clients by beating the banks.
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