It’s more than just the down payment
Buying a home is an awesome financial goal! There are so many pros to owning your own home. There’s more privacy. You can paint the walls without having to ask permission. Unlike a car, this investment might actually appreciate over time. The list goes on.
With that said, the process of buying a home can seem daunting, especially if you’re a first time buyer. It helps to work with a realtor you trust (if you choose to work with a realtor at all!), but it’s also helpful to make sure you’re financially prepared for the cost of buying a home. To do that, you need to know what to expect.
When my husband and I started looking to buy a home, we had already saved up the amount we’d agreed on for the down payment. Naively, we thought that the down payment was the only thing we’d need to pay for. And, boy, were we wrong!
Below is a list of expenses we were surprised to learn about, roughly in order of what we had to pay first to last. You might be required to pay for some of these too. But, disclaimer, this isn’t an exhaustive list of upfront expenses that everyone will pay. (You can find a more comprehensive list here.) You might pay other fees that are not listed here. So if you’re planning to buy a home soon, evaluate the list below to make sure you have enough set aside for at least these things. If you’re just starting to think about saving to buy a home, be sure to consider these upfront costs so you’re fully prepared when it comes time to buy.
Costs that Come Early in the Process
Many of the fees you’ll pay for are lender fees that are only applicable to you if you take out a loan to purchase your home. However, there are some fees and upfront expenses you’ll pay for even if you pay cash.
Application Fee: If you plan to get a home loan to help make the purchase, your lender might charge a fee to process your loan application.
Credit Report: You might pay separately to have your credit report processed. Your lender will need a recent credit report to determine your interest rate, and to make sure you’re eligible for a loan.
Good faith payment / earnest money deposit: This is the sum you’ll pay to the seller of the home you’d like to purchase to show you’re serious about the property. And you might pay this with or without taking out a mortgage. Generally, the earnest money deposit is usually 3% of the home’s purchase price, which can be a lot. Keep in mind that the payment will count as a portion of your down payment and is refundable if you don’t follow through with the purchase.
Inspections: Once you get your offer accepted by a seller, you’ll be advised to have several inspections done on the home so you’re fully aware of the state of it. There are a few common inspections: home, chimney, pest and lead-based paint. You’ll pay for these inspections upfront when they happen, and the exact cost for each will depend on where you live and vary from company to company.
Closing costs is a blanket term that covers a wide array of fees you’ll pay for at the end of the home-buying process. These costs are the second biggest expense you pay for upfront next to the actual down payment amount. On average, people pay between 2 and 5 percent of their home’s purchase price in closing costs. That’s not a small amount!
So what exactly are closing costs? Mostly they are lender fees, taxes, and other miscellaneous fees you might pay to third party companies or even to your state.
Loan Origination Fee: This is the fee you’ll pay to your lender for doing the work involved in making your loan. You might pay this fee upfront, rather than later on during the closing process.
Title fees: Your lender will work with third-party companies throughout the home buying process. They often work with title companies who are responsible for researching the deed of the home you’re interested in purchasing to make sure no one else has a claim on the same house. Title fees also include title insurance that protects you, the buyer, and the mortgage company in the case that a claim is made while the sale is in progress and also during the duration of your homeownership.
Appraisal Fees: Once you select a home and begin the buying process on a particular house, your home will be appraised by a third-party to confirm the value of the home. If your home is appraised for more than you’re purchasing it for, that’s a good thing! If not, then, you might have some negotiating room with the sellers. If you plan to purchase a home in cash, you don’t technically need an appraisal. But it still might be worth having done as many insurance companies will require one in order to cover the home.
Government Fees: This isn’t a fee you pay to your lender or escrow agent, but they may collect them for you and then pay out to the appropriate place. These fees include recording fees to the state and/or county, which they require for doing the work to record your deed, mortgage and documents related to your home loan.
Prepaid Interest: Your lender may ask you to pay any interest that accrues on your loan between the date you sign the closing documents and your first official mortgage payment.
Courier Fee: These fees are sometimes referred to as notary fees. When you sign your closing documents at the end of the home buying process, you’ll need to sit down with either the title company, escrow company or attorney to sign the closing documents. If you can’t make it to their physical office and they instead travel to you, you might be asked to pay this fee.
Home Insurance: Again, this fee won’t go to the lender or escrow agent, but they’ll facilitate the payment. When you buy a home and select your insurance policy, you’ll be asked to pay some of the premium up front. If you’re paying for a home in cash and want to purchase insurance, you’ll pay the insurance company directly.
Property taxes: These taxes are usually prepaid at the time you close the deal. Where your home is located and its current value will determine how much you will pay at closing. You may also need to pay the sellers back if they paid property taxes up until a date they’ll no longer own the home.
Transfer taxes: These are the taxes paid to the state for transferring the ownership of a home from one party to another.
Existing rent + new mortgage: This might seem surprising, but can be an expense that’s overlooked. Depending on the timing of when you buy a house and move in, you might end up paying for your old apartment or house while paying your new mortgage. Paying for two places can be expensive, so be sure you’ve added a buffer in your budget to allow for this.
Realtor Fees: In many cases, the sellers are responsible for paying the buyer’s realtor. However, that’s not always the case and the conventions may differ depending on where you live. In some cases, sellers will negotiate with the buyers so that they pick up all or some of the tab. No matter what, it’s helpful to be prepared to pay these fees. If you end up not having to, then that’s money you get to keep!
You might be thinking, “Wow, there’s a lot of stuff to save for!” You’re right, there is. But it’s totally do-able with time and focus. Get in touch with a lender in your area to get a better sense of how much each of these fees might cost for you so you have a better idea of exactly how much to set aside. If you plan to make a cash offer on a home, find a local real estate agent who can help you think through the fees you’d still be required to pay.