The Hidden Costs and Fees of Buying a Home

House and Money

When considering the cost of buying a home, there’s more to think about than just the down payment. So how much will it actually cost? We’ll take you through the kinds of expenses you can expect through the process, from start to finish.

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Right off the bat, it’s essential to speak with a lender. Even if you’re not thinking of purchasing a home for another six months to a year, getting that relationship started will be extremely beneficial. Speaking with a lender early on is preferable, since they can help you with any credit issues or finance concerns, or even just helping you start the process of choosing the best loan type for your situation. Lenders are such a fantastic tool for you as a home buyer because they’ll let you know how much you truly have to have saved, and how much you will need, for this process. In general, a lender is there to answer to any and all question you’ll have about this process so that when you’re truly ready to purchase a home, you’ll be prepared.

So let’s break it down, from the beginning: what costs can you expect when purchasing a home?

One of the most asked questions from buyers is how much they’ll have to pay a realtor to represent them in the purchase of a home. In most cases, the seller of the home is the party who pays the cost of the realtors. The seller will pay a commission to the listing agent handling the sale of the house. They then, in turn, give a part of that commission to the agent representing you, the buyer, in the transaction. That commission is pulled from the total profit amount of the home, which means it’s already built into the pricing. In this way, you aren’t directly paying your agent to represent you in the purchase of a home; you aren’t paying them for the hours they work on your purchase, you aren’t reimbursing them for gas/mileage, etc. The buyer’s agent is part of the cost of doing business. For this reason, it’s really important to find an agent that you really like, that will work hard for you and communicate with you throughout the entire process.

Once we have found your home that you have love and you have had your offer accepted on it, you will typically have earnest money due. Now, earnest money is a deposit made to the escrow account that represents a buyer’s good faith to the home. This money is due within the first three days of opening escrow and will be done through a wire transfer at the bank. Not wiring these funds over or delaying this could possibly mean losing that home because it’s part of that normal contract. The actual amount of the earnest money will vary, but it normally ranges from 1-3% of the purchase price. For example, on a $500,000 home the earnest money could be anywhere from $5,000 to $15,000. Keep in mind that some of the sellers might ask for a higher amount to be deposited because it shows them that you have more skin in the game. The more you put in the earnest money, the stronger your offer is to the sellers.  Just be aware that you want to make sure that your money is protected by your offer.

This is something that your realtor should talk to you about more in depth. Now, should something happen during escrow that was not the fault of the sellers, the sellers may be entitled to keep this earnest money. So for instance, you can’t back out of an escrow on a house because a better house came on the market towards the end of this escrow.

Now, that earnest money that you’ve deposited at the beginning of the escrow is not just lost money, so don’t be afraid for that at the end of the escrow. It’s usually applied towards your closing costs or your down payment. Even on a no-down payment loan, it’s still recommended that you  put forth a minimum of $1.00 up to $1000 to show that you are serious about the purchase. Again, make sure you speak with your lender and your realtor about the earnest money because every home will be different.

Now you’re got your earnest money: what else will you need to pay for?

This next phase of buying your home is when you enter the inspection and investigation period. Your sales contract will specify how much time you have to review the home, have inspections done, and ultimately decide if you are going to move forward or terminate the contract based on those findings.

But what exactly are these inspections, and what costs are associated with them? First off, there’s a general inspection (which we’ve previously discussed in more detail). Whether you are a renter living in the home you’re about to purchase or this is a new home for you, it is essential for you to get an inspection done. The best time to do this is within the first week of opening escrow because the sooner you know about a potential issue, the sooner arrangements can be made to get it fixed.

An inspection will show you what potential problems there could be with the home. The inspector will go over the entire house, looking inside and out. They will test as much as they can that can be tested in the home before putting together a very in-depth report of findings, both good and bad. This whole process will usually cost somewhere in the $275-$400 range, but it truly depends on the size of the home. This a cost that is due at the time of service, and is to be paid by the buyer (you). Most inspections take cash check, credit card, debit card, but remember that every inspector is different. When looking for an inspector, Do some comparing or ask your realtor for some recommendations.

Now, if you have things like a pool, a septic tank, older roof, air conditioning issues, electrical issues, or even foundation issues, then you’ll want to bring in an additional specialist. Pool inspections can be upwards of $400 depending on the amount of equipment you have in the home. But sometimes things like roof inspections can be done at no charge by a roofing company who will come out and let you know what work needs to be done. Again, any inspections you get done is on your cost and is to be paid at the time of inspection, not through escrow. You are welcome to have as many inspections done as needed, and as long as it’s in your inspection period, you’re fine.

It’s always safest not to skip an inspection; the cost will be worth it. But be prepared that if you have specialized equipment or older features to the home–or if it’s just an older home in general–it’s likely that you’ll be spending more on that. You should also consider getting a termite inspection done. This inspection could cost around $150-$200. Many loan programs require a termite report. Sometimes this may be something that the seller pays for as well; this would depend on how your realtor writes up your contract for you. Should there be any termite damage, there will be a separate cost to fix and repair any structures or areas of the home that were damaged. So depending on how the contract was written up, either you or the homeowner will be responsible for these costs.

There are cases where a seller will pay for some items, such as the termite inspection or the home warranty. The home warranty will be a year of coverage on the home. Should anything happen to the AC or hot water heater, usually it’s around $700, but it depends on the size of the home and if you have a pool or not.

We recommend not having the seller pay for inspections, aside from the termite report, because it could possibly become a conflict of interest. Again, it’s all based on what you and your realtor have discussed and how your realtor subsequently writes up your contract.

All in all, inspections will probably cost you at least $300 or more, depending on the home size and features.

Next up: the appraisal

Another cost aside from the inspection, though usually happening during the same time period, is the appraisal. A home appraisal is done to determine the value of the home being purchased. Most loan programs will require this prior to funding a loan. Lenders won’t want to approve a home loan if the home isn’t worth what you’re paying for it. Appraisals are going to run around $600, but that can vary by appraisal company, and if you’re trying to get it done in a rush, there are extra charges that can sometimes be a few hundred dollars.

The appraisal is paid by you, the buyer, and will usually be done in the first week, right after escrow opens, and can be done via credit card. Your lender will go ahead and send you an email with a link, and you’ll pay from there.

After going through the home and receiving the results of any inspections, it’s time to remove the contingency. Removing the contingency means that, as a buyer, you are no longer able to back out of the contract. There are specific timeframes in place to protect you, normally about 17 days after the acceptance of your offer, and to get those inspections done and accept that you are okay to move forward in the process. Again, this is all determined by how your realtor has written up the contract. However, that contingency period also protects you as buyers as well, because should you find something major wrong with the home that perhaps the sellers are not willing to fix or credit you a dollar amount towards fixing it, then you can safely back out of that contract and still get your earnest money back. You’ll only be out the cost of the inspections and the appraisal.

As long as everything comes back fine with the appraisal, you’ll be in a good spot to move forward with the purchase.

The next things to consider are closing costs and the down payment. Your down payment will range anywhere from 3% to 20% on average, and that money will need to be available to wire before you sign your final paperwork. Make sure that you have that available in your account. For things like FHA loans, that number will be around 3.5%. For a VA loan or a USDA loan, it might be 0%. It all depends on the loan type that you have.

Next: closing costs. These are fees and expenses that you’ll incur for purchasing a home, such as loan origination fees, appraisal fees, title, search and insurance, survey fees, escrows closing fees, notary fees, document preparation fees, and recording fees. The total amount that you pay in closing costs varies a lot depending on your location, your county, and even the day that you close. But typically, it’ll be about 1%-3% of your purchase price. Using our example of a $500,000 home, that down payment would be between $5,000-$15,000 on top of any other fees that you’re paying. Your loan officer will give you documentation that shows you which of these fees are areas where you might be able to shop around. A notary fee, for example, is one that you could save money on. Meanwhile, the appraisal fee is one that can’t be negotiated, and you wouldn’t be able to shop around and find a lower rate.

Definitely talk to your loan officer about the loan estimate and the various fees if you’re trying to reduce the amount of your closing costs. There’s usually not too much you can reduce there, but every dollar matters. And just knowing what you, as the buyer, are truly paying for is a key part of the process.

Let’s talk endgame: moving in

Typically, you’ll have to wire your closing costs and your down payment into the escrow account a day or two before the actual signing takes place, right before you close and get your keys. Once you’ve closed escrow and you’ve got your keys, the next set of fees are when you’ve actually moved.

Most importantly, you have to get your utilities sorted and into your name. Some of these may require a deposit, so make sure you budget for that. Some homes may have been vacant prior to your move, so they’ll require more time to get the utilities turned on. It’s always best to get the gas, water, and electricity turned over and put in your name as soon as possible.

The biggest moving cost, which should come as no surprise, is literally moving. If you’re just moving across town, the average price to move a three-bedroom house is around $480-$800. Cross country, you’re looking at a cost of at least $2,000-$5,000 plus $0.50/lb. An average three-bedroom home has 5,000lb worth of items, so you could be spending upwards of $5,000-$15,000 to move from one home to another across the country, depending on how far and how much you’re transporting. And, of course, the cost will also depend on the moving company you use. Each company is different, so definitely shop around.

And still, there are some other costs to consider. Don’t forget furniture! If you’re moving into a larger home, especially from an apartment, you may need to get some extra furniture for the larger spaces. And before you move everything in is also the perfect time to paint, update flooring, or make other adjustments that you need or want. It’s also a good time to make repairs to the home, since nobody will be living there. Plumbing is a good example, since it usually requires turning off the water.

Lastly, you might also need or want to get any carpeting cleaned or replaced and consider any necessary landscaping costs. All of these costs can add up quickly, so make sure you do your research on different companies and keep an eye on your budget.

To sum it up…

…there are a lot of different costs during the home buying process that aren’t as obvious. These are the hidden costs of buying a home: they’re not part of the down payment, they’re not part of closing costs, and they happen at different times and for different reasons.

In addition to things you’ll have to do, there are also things you should NOT do; once you’re in escrow, it is extremely important that you do not make any other large purchases or add a substantial amount to your existing debt. Don’t apply for a store credit card just to save 20% at Home Depot or Kohl’s. Don’t go buy new furniture. Don’t open a new credit card. And please… Do. Not. Buy. A. Vehicle. No new vehicles are allowed during the escrow period! These kinds of things could put your debt-to-income ratio higher that what your home loan approves you for.

So please, PLEASE do not buy unnecessary items until AFTER you close escrow. The next day, if you want to buy every car on the lot or open 50 credit cards, go nuts. But don’t risk losing the home and possibly all that money that you’ve invested into it by doing something too soon.

Realtors and lenders know that life happens and all that, but if a financial issue does come up that can’t be avoided or rain checked, speak to your lender immediately. That’s why it’s so important to have a lender that you trust, who’s on your side that you can speak with anytime so that they can advise you on if something could potentially cause you your loan to not go through. Most will tell you that those 30 days of escrow is a time for you to not touch your money. It’s so important because something might be minor to you, but it could be a huge thing to the underwriting or lending team. It’s not worth it. Don’t risk it!

As always, there are a lot of factors that will influence everything we’ve discussed here. The best thing to do is to keep a consistent and open channel of communication with your realtor and your lender, especially if you’re a first time home buyer.