First Home Costs Beyond the Down Payment

On top of your down payment, buying a first home takes closing costs, prepaid insurance and interest, an initial deposit into your escrow account, and money for things that never appear on the lender's forms, such as moving and early repairs. The Consumer Financial Protection Bureau defines closing costs as the upfront costs you'll be charged to get your loan and transfer ownership of the property. Your Loan Estimate shows them, and your Estimated Cash to Close pulls everything together. This guide walks through each line so you can set a savings target before you make an offer.

What the Loan Estimate adds to your down payment

Page 2 of the Loan Estimate groups your closing costs. The CFPB's explainer describes each group:

Loan Estimate group	What's in it	Can you shop for it?
Origination charges	The lender's own fees, such as application, underwriting and processing fees, plus any points you pay for a lower rate	Compare between lenders
Services you cannot shop for	Third-party services the lender requires and chooses, such as the appraisal; any upfront PMI premium usually sits here	No, but compare the total between lenders
Services you can shop for	Required services where you may pick the provider	Yes
Taxes and other government fees	Government taxes and fees on the loan and the transfer	No
Prepaids	Property taxes, homeowners insurance and interest until your first payment is due	You choose the insurer
Initial escrow payment	A starting balance for the account that pays your property tax and insurance	No

When you compare lenders, the CFPB's advice on origination charges is that it's the total that matters, because some lenders itemize more than others. Two lines catch people out. The CFPB notes that you'll usually pay the first 6 to 12 months of homeowners insurance at or before closing. And prepaid interest covers the daily interest between your closing date and the period your first monthly payment covers, so the date you close changes the figure.

Earnest money, credits and cash to close

Earnest money is a deposit you pay to show good faith once you've signed a contract to buy. According to the CFPB, it's held by the seller or a third party such as a title company. If the sale closes, it can go toward your closing costs or down payment. If the contract ends for a permissible reason, you get it back. If you don't act in good faith, you can lose it to the seller.

Your Estimated Cash to Close is your down payment plus closing costs, minus any deposit you've already paid, seller credits and other adjustments. That subtraction is the trap. Cash to close can look smaller than what you actually need, because the earnest money left your account earlier.

Get the cash itself ready in good time. The CFPB says you'll typically need a cashier's check or wire transfer for the amount due at closing, and your lender will need to document the source of the funds you bring. Money shuffled between accounts at the last minute, or a gift from family, can mean extra paperwork, so tell your lender early where your money is coming from.

Credits aren't free money either. The CFPB explains that a seller who gives you a credit toward closing costs will usually want a higher price, and a lender credit usually comes with a higher interest rate or a larger loan. You still pay; you just pay over time.

A worked example

Here's an illustration using our closing costs calculator. The line items are made-up round numbers, not typical costs. Use the figures on your own Loan Estimate.

• Price $350,000 with 10% down: a $35,000 down payment and a $315,000 loan.
• Origination charges $2,500, services you can't shop for $1,500, services you can shop for $2,500, taxes and government fees $1,200, prepaids $2,800 and initial escrow $1,600.
• Earnest money of $5,000, paid when the contract was signed.

The calculator totals closing costs at $12,100, or 3.5% of the price, and cash to close at $42,100. But the buyer has already handed over $5,000 of earnest money, so the cash this purchase takes is $47,100, before a moving truck, a home inspection or the first trip to the hardware store.

Costs that happen outside closing

Some costs sit outside the Loan Estimate, and they're easy to forget:

• Home inspection. The CFPB notes you typically have the right to hire an inspector to examine the property. Budget for the inspector's fee alongside your closing costs.
• Moving, furniture and utility deposits.
• Early repairs. The CFPB's homebuying worksheet gives 1% of the price a year as a common rule of thumb for maintenance. Don't be surprised if some of the first year's share is needed right away.
• An emergency fund that survives closing. The CFPB warns against sacrificing savings to buy a bigger house.

Watch for the Closing Disclosure. Lenders are required to provide it three business days before your scheduled closing. Compare it line by line with your latest Loan Estimate, and ask about anything new.

How to budget, and when to spend less upfront

We'd set one savings target that covers everything: down payment, closing costs, anything you'll pay outside closing, and an emergency fund you won't touch. Say that comes to $55,000 for the example above, and you already have $15,000 saved. Our savings goal calculator shows you'd need to save $998 a month for three years, assuming 4% interest a year. If that's out of reach, lower the price, not the cushion, and check the new price with the home affordability calculator.

The usual advice is to pay closing costs in cash and avoid credits. That flips in two situations. If paying everything in cash would drain your emergency fund, a modest lender credit that preserves your reserves can be the safer choice. And if you expect to sell or refinance within a few years, a slightly higher rate in exchange for lower upfront costs may cost less overall, because you won't pay that rate for long. Ask each lender to price both options on the Loan Estimate. If a HUD-certified housing counselor is available near you, it's worth a conversation before you sign.

Next 10 minutes: list every cost above against your savings. Today: request Loan Estimates from at least two lenders for the same loan type. This week: put your full target, cushion included, into the savings goal calculator and set up the monthly transfer.

Sources

1. Consumer Financial Protection Bureau: Loan Estimate explainer
2. Consumer Financial Protection Bureau: Closing Disclosure explainer
3. Consumer Financial Protection Bureau: Mortgage key terms
4. Consumer Financial Protection Bureau: What fees or charges are paid when closing on a mortgage and who pays them?