First time home buyers pay on average about $22,063 at or around the time of purchase. And that’s assuming there are no upfront repair costs. In this article we’ll break down the cost of buying a house and explore ways to lower it.
Also, note that this article is intended to cover only costs at or around the time of purchase. If you’re interested in the ongoing and monthly costs associated with owning a house after purchase, check out this article’s sibling on the costs of owning a home.
The Cost of Buying a House: Breaking it Down
Below are the average costs of buying a house for first time homebuyers. If you assume no repair costs, they add up to about $22,063. Now lets learn a bit about each one and see how they can be lowered.
- Down payment: $14,580
- Closing costs: $3,860
- Prepaids: $2,577
- Upfront repairs: $0 – $20,000+
- Inspections: $1,046
Down Payment
The average first-time homebuyer pays about 6% of their property’s purchase price as their down payment. Given a typical starter home cost of $243,000, according to Redfin, that comes to $14,580. If that number is too high, don’t despair just yet—there are at least a couple ways to lower it.
Using a conventional loan, most first-time homebuyers can achieve a down payment of as low as 3%. That alone cuts our initial estimate in half, down to $7,290. And famously, if your household includes a veteran, you may even be eligible for a $0 down payment loan through the VA.
If it’s so easy to lower the down payment, though, why doesn’t everyone just use the lowest down payment possible?
The answer is that doing so comes at the cost of higher monthly mortgage payments. For help with factoring in that side of the equation, we again invite you to check out one of our other articles: The Costs of Owning a Home.
Closing Costs
Closing costs are basically the sum of all the little costs a lender charges in order for a real estate deal to close. This is to cover things like property appraisal, title insurance, government fees, and many other things that can differ between lenders and government municipalities. On average, buyer closing costs amount to $3,860 at purchase, according to ClosingCorp.
One particular cost that’s worth mentioning is private mortgage insurance, or PMI. For certain types of loans, notably the government FHA loan, PMI must be paid upfront. In the case of FHA, the upfront cost is 1.75% of your loan. For most loans, however, if there is PMI it’s only paid over time, which is why we go into more detail about it in our costs of owning a home article.
Closing costs are fairly unique in that you can negotiate for the seller to pay them. Some tips for doing so include agreeing to a higher purchase price or pointing out hidden repair costs such as might be uncovered by a home inspection. Alternatively, you can check with your lender to see if they might be willing to roll your closing costs into your mortgage so that you don’t have to pay them upfront. Both of these methods can potentially get your upfront closing costs down to $0.
Prepaids
Often, before a buyer can close on a property, the lender will require them to prepay for certain ongoing expenses. The most common prepaid expenses are as follows, with definitions from Bankrate and average numbers for the first three items from Real Estate Witch.
- Homeowners insurance premiums for 6-12 months paid upfront: $758 – $1516
- Property taxes for 2 months put in escrow: $465.83
- Home homeowners for 2 months put in escrow: $252.66
- Mortgage interest prorated from the date of closing to the end of the months: $48.10 – $1442.85
Note that unlike other costs associated with closing on a loan, prepaids usually can’t be rolled into the loan, so you’re more or less stuck with them.
For the purpose of determining how much cash you will need in order to close on a property, you should add prepaid costs to the rest of your upfront costs, as you will need to have the cash for them.
For purpose of determining whether a given property is a good financial investment, however, we recommend leaving out prepaids, as you should account for them instead when accounting for your monthly or annual payments that the prepaids are just covering in advance—you just don’t want to count them twice.
Upfront Repairs
Of all the costs covered in this article, repairs are perhaps the most variable and least predictable.
Some homes have virtually no upfront repairs. We say those are “turnkey”—cause all you have to do is turn the key!
Other homes, however, can easily require tens of thousands of dollars to repair. If you intend to remodel a kitchen, for instance, that alone may cost $26,829 on average, according to HomeAdvisor. Replacing large capital expense items like the roof ($9,000+) or the furnace ($4,000+) also adds up very quickly. If you’re curious about the average cost of replacing the most common large expense items that homes typically have, check out the Capital Expenses section of our costs of owning a home article.
All that said, why doesn’t everyone just buy turnkey properties?
As you are probably aware, a place that requires more upfront repairs may also come with a lower purchase price—and that can even help offset the repair costs by lowering the down payment. That’s not guaranteed, though. You’ll want to crunch the numbers for each fixer-upper that interest you to determine if its repair costs are actually affordable and worth it.
Finally, when sizing up repair costs, we strongly recommend hiring an inspector, lest you get stuck with a $20,000+ foundation repair job that you wouldn’t have known about otherwise (which would have happened to me had I not hired an inspector).
When an inspector uncovers significant damage that needs repair, that’s often a good time to negotiate with the seller—sometimes you can even get them to make the repairs before closing.
Inspections
The last major cost of buying a house comes in the form of inspections, namely home inspections, sewer line inspections, and radon testing. Technically, these aren’t necessary costs, but if you want to avoid huge unintended costs or health hazards, they’re worth it.
- Home Inspection: $341 Bankrate
- Sewer line inspection: $285 Forbes
- Radon testing: $420 HomeAdvisor
One thing to note is that depending on how the homebuying process goes, you may end up paying for some of these multiple times. If a home or sewer line inspection uncovers too much damage and saves you from buying a money pit, that’s great—but it also means you’ll probably have to pay for another inspection for the property you make an offer on.
The exception is that it might be worth holding off on radon testing until after purchase, as the average cost of radon remediation is only about $1,000 according to Forbes, so it’s probably not worth paying for multiple radon tests throughout the homebuying process. That said, we recommend due diligence, as ever: it’s probably a good idea to verify radon testing and remediation costs in your area.
The Cost of Buying a House: Bringing it Together
There you have it—all the major costs of buying a house, alongside strategies you can use to lower them.
Now let’s circle back to where we started: the average first-time homebuyer can expect to pay around $22,063 in upfront costs for a typical starter home. But what happens when we apply some of the cost-saving strategies we talked about?
Assuming the property is already turnkey, requiring no significant upfront repairs, we’ll just use the smallest conventional down payment (3%) and negotiate for the seller to pay closing costs (by increasing the property’s purchase price by $3,860), which gives us a grand total of $10,913—less than half of what we started with. Just remember that these strategies tend to increase the ongoing monthly costs of owning a home, so be sure to take those into account, too.
And if all of this math seems overwhelming, have a look at our HomeEstimator app, designed to add up all this stuff for you.
