Recent history has made purchasing a home easier than it has ever been. With so many different types of loans, there is a loan for everyone. There are short loans, low-money-down loans, Veteran loans, and even agricultural loans, so finding a loan that fits your needs and wants isn’t too difficult. But be sure to have some cash on hand even if you want to finance as much of the purchase as possible. There are a few expenses in the purchase process, and they can add up fast.
When you first begin looking at homes all the way up until you go under contract, there won’t be any costs. Working with a buyers agent is usually free for the buyers, except for in a few less-common situations (even in a rare occasion when you do need to pay the agent, it is at closing, at the very end of the process). The buyers agents commission is paid from the proceeds of the sale if the house is listed for sale through a real estate firm, and most For Sale By Owners also agree to pay the buyers agent for the buyer.
Before you go under contract, and really before you ever start looking at homes, you should speak with a Mortgage Lender and decide what type of loan you want to use. I personally prefer a conventional loan, as it usually has a lower interest rate, and more houses will qualify for a conventional loan than other loans. You can usually secure a conventional loan with a 3% down payment or higher, and a 620+ credit score. An FHA loan is another very popular option because it only requires a 580+ credit score. They can be obtained for around a 3.5% downpayment, they typically have a higher interest rate than conventional loans, and some houses may not be able to qualify for FHA that would for conventional. But speak with a professional and highly rated mortgage lender, and discuss what type of loan would best fit your situation! A down payment will make up a good portion of the closing costs, so finding out what you will need for a down payment will give you a good idea of what your closing costs will be. Mortgage lenders also will know what fees they charge, and what the fees of the loan origination are, so they can usually give you a rough estimate of what your closing costs will be.
Once you go under contract, you will encounter your first out-of-pocket expense. A Due Diligence Fee is used to pay the seller to take their home off of the market while the buyer performs their due diligence before they purchase the home. This fee is usually around 1% of the purchase price, and it buys the buyer a few weeks to do any inspections and appraisals they want or need to do before closing. It provides the buyer with an escape route if they decide they don’t want to buy the house. Earnest Money is another fee that will be paid shortly after going under contract. It is nicknamed “Good Faith Money” because it shows good intention to the seller, it shows that the buyer is serious and really wants to move forward with the purchase. Due Diligence money is due as soon as you go under contract, and Earnest money is due very shortly after going under contract. Due Diligence and Earnest Money are not required to purchase a home, but sellers will rarely consider an offer that does not have one or the other.
*SIDE NOTE: If a buyer decides to back out of the purchase, Due Diligence and Earnest Money are used to “buy” the prospective buyer out of the contract. In most instances, if you back out you will lose your Due Diligence money, but you can get your Earnest Money back. There are a few variations that can affect where they money will go if a buyer walks, but that is enough to make an entire separate blog post on. The important thing to note is that if the buyer does go through with the purchase, both the Due Diligence Fee and Earnest money are credited back to the buyer at closing.
The next expense most buyers will incur will be shortly after they go under contract. Once under contract, most buyers want to feel more secure about the house before moving forward on it, so they will pay for a professional Home Inspection. A home inspectors job is to go through the house and point out issues and flaws it will have that may affect a buyers decision. They will look at things such as structural damage, roofs, plumbing and drainage, and other things. These inspections usually range between $300-$600, depending on the size of the house. There are several other types of inspections that home buyers can choose to purchase as well, such as Radon inspections, wood destroying insect inspections, mold inspections, and septic inspections, to name a few. Most of these inspection companies I have worked with prefer to be paid when the inspection is complete, but some will allow you to pay them when you close on the home (their inspection fee will be added onto the other closing fees and down payment).
*SIDE NOTE: A home inspection is not required in most Real Estate transactions. As a Real Estate Agent, I always encourage Buyers that I work with to obtain at least a home inspection. A $500 report can save you a lot of headache if they show an issue that you had no idea about before. Even more, a home inspection is also a great tool to use to negotiate with the seller if it shows issues that need addressed.
The next expense a buyer will face (unless they are paying cash for the house) is an Appraisal fee. If you are using a loan to purchase a property, the bank will need to send an appraiser to the property to make sure that the bank isn’t giving more money for the house than it is actually worth. It is one of the ways banks try to protect themself, this way if a buyer defaults on the payments, the bank knows they will not have more money invested in the house than it is actually worth. Appraisal fees are usually $400-$600 and they also usually want to be paid before closing but some banks will allow you to pay the appraisal fee at closing.
Once you get to the closing table to finally purchase the home, that is where you will see the bulk of your closing costs. While the lender should be able to give you a rough estimate of what the total cost to close should be, you will usually get the Closing Disclosure with the exact total needed just a day or so before closing. They don’t give you much notice, so it is important to be prepared for even if the closing costs are higher than the lender anticipated! If you cannot close due to insufficient funds, you will be forced to void the contract, and the seller will get to keep your Due Diligence Money and Earnest Money. The Closing Disclosure does exactly what it sounds like, it discloses all of the expenses and terms of the closing. It will include expenses such as loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed recording fees, and credit report charges. There will also be a credit to you at closing for the Earnest Money and Due Diligence you have already paid.
In summary, when you are looking to purchase a home, it is important to have a pile of money set aside solely for the home purchase. Your down payment, inspections, appraisal, taxes, and other fees will all add up to total the amount you will need to bring to closing. Working with a great Real Estate agent can also help minimize your expenses at closing, as a skilled agent will be able to negotiate some buyer side closing costs paid by the seller. This is an incredibly useful tool that I have personally used several times to help my buyers secure closing costs as low as possible. If you are considering buying a house, I hope this article provided lots of insight into the buying process for you! Please contact me with any questions you have or to get started on your home search today. Call or Text me at (828) 855-6514 or Email me at Aaronrobbins157@gmail.com.
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