A lot of times, buyers ask me about the cost associated with purchasing a home. It seems like when you buy a home, there’s so many costs that you don’t even know what they mean. I’m here today to explain to you what they are.
First one is an earnest money deposit. I like to think of this kind of like when you put a deposit down for a rental car. That money goes towards the purchase of your house, and it’s basically there just to show that you’re going to purchase the home in good faith. If for whatever reason, you choose to walk away from the home, there are stipulations, some which you may get that money back and others in which you don’t. If you do continue to purchase the home, that money will be applied towards your down payment.
Next is an Escrow account. Escrow accounts are set up by the lenders, and this is a separate account from your mortgage. You pay your mortgage every month, and a portion of it goes into your Escrow account to cover the cost of taxes and insurance at the end of the year. At closing, you can expect to put anywhere from 3 to 12 months pro-rated into your Escrow account. What this means is that it’s kind of starts as a buffer; you’ll have that money there so that when the tax bill rolls around the first year, you’ve already covered it through your closing cost.
Next is an origination fee. This is a fee paid to the lender for under-writing and originating your loan. The fee varies among different vendors, so be sure to shop around for a lender that’s comparable.
An inspection fee normally ranges from $350-500 dollars. This fee allows an inspector to come to the house that you plan on purchasing, and inspect it for any structural defects. Also, if you’re concerned about wood-destroying organism, you can get a wood-destroying organism report, which will look for termites in the home. This is an additional $150. Remember, when dealing with repairs, after the inspection, we’re able to request repairs to the seller. The seller, in turn, can either choose to repair those items, or they can choose to not repair those items. They also may give you a cash allowance at closing to go towards the repairing of those items. Keep in mind that with repairs, we’re doing this for structural issues. Things such as cosmetics can be taken care of on your own.
On your settlement statement, you’ll find a credit check fee. It’s normally anywhere from $25-30. When your credit gets sold by the lender, the lender pays that up-front fee to make sure that your credit is sound. At closing, this comes back to you. Insurance is paid up-front the first year, so before closing on the home, you’ll have to prove that you’ve got homeowners insurance. If there’s any type of hazard insurance, including flood insurance, that will have to be proven as well. Every year after the first year, the money that goes into your Escrow account each month will be enough to cover your insurance payments.
You’ll also be charged for an appraisal. What an appraisal does is it allows you to know that the value of your home is what you’re paying for. Lenders will not lend money without making sure that the house is worth what they plan on loaning. This appraisal cost is normally $400-500, and that cost is added to the closing cost on your home. You’ll pay for it at closing. Remember that if the home does not come in at appraised value, meaning that your purchase price is higher than what the home is actually worth, at that point, we’ll have to go back to the sellers and negotiate different terms for the contract.
The title company charges a title search fee. This is to make sure that there are no liens on the property that you plan on purchasing. Normally, this is a seller paid expense. However, it does show on the settlement statement. Also, a survey is conducted. This allows you to know where the property boundaries lie. These normally range anywhere from $300-400 and are generally a seller’s expense. Remember that on your settlement statement, it will include the prorated taxes for the portion of the year that you’re living in the home. The seller will pay for the portion that they lived in the home, and you will pay for the portion that you’re living in the home on the settlement statement and at the closing table.