By the time potential homebuyers begin searching for their homes, they’ve typically penciled in a budget for the overall price of the house and their monthly mortgage payment. But there are other costs to consider when planning a homebuying budget. Upfront costs — the one-time expenses you’ll pay after you make an offer on a home and it’s accepted — can’t be avoided. How much they total will depend on several factors, including the type of mortgage you choose and how much you’re borrowing. Because the specific amount will vary, you should communicate clearly with your homebuying team to determine precisely what to expect when buying your home.
Take a look at 6 these essential upfront costs you should prepare to cover when purchasing a house:
Earnest money deposit
As a potential buyer, you submit earnest money – usually 1 to 5 percent of the purchase price – within 24 to 48 hours after the seller accepts your offer. This deposit shows the seller that you’re a sincere buyer, and they can feel confident that the transaction will go through and take their property off the market. The money is held by a third party or in an escrow account until closing. At which point, the earnest or good faith deposit, as it’s sometimes called, is applied toward your down payment, or closing costs. Note that if you don’t abide by the tenets of the contract, it’s possible to forfeit your earnest money. However, if the transaction falls through because of the seller, you’ll likely get your earnest money refunded.
One of the most significant benefits to Veterans and active-duty members is that VA and USDA loans don’t require down payments. In contrast, conventional loans typically require at least a 5-percent down, the minimum is 3.5 percent for FHA loans, and some lenders may go as low as 3 percent. Down payments vary by lender and by the borrower’s credit history. That 20-percent down payment we’ve all heard about is pretty much relegated to the myth department these days. In fact, in 2020, the median down payment was 7 percent for first-time homebuyers.
Your lender will order an appraisal to assess the property’s fair market value, but you, as the borrower, will usually pay for it upfront. Note that this out-of-pocket fee won’t be refunded if the buyer or seller fails to move forward with the sale of the property. However, you could negotiate the fee with the seller and try to get it back during closing. Appraisal fees generally depend on the size of the property and location, but you can expect to pay an average of $450 for a home appraisal.
Once the seller accepts your offer, and the house goes into escrow, you’ll need to arrange a home inspection — and you’ll pay for it. Prices for a home inspection range from about $300 to $500, depending on the property size and location. While an appraisal gives you the property’s value, a home inspection gives you a complete and detailed report of any maintenance issues with the house. Essentially, it lets you vet the place before moving forward with the transaction. Home inspections aren’t mandatory, but why would you plunk down a few hundred thousand dollars on a house without knowing if the roof is ready to cave in or the plumbing is leaking? The results of a home inspection often spark negotiations in price reductions when major problems surface. Ask your real estate agent to recommend several well-qualified home inspectors in your area.
You’ll pay closing costs to those representing your home purchase, including your lender, real estate agent, and various third parties involved in the sale. These are costs and fees associated with originating and closing on your home loan. Also known as settlement fees, closing costs vary greatly depending on the type of loan you choose and in which part of the country you’re buying. The good news is that you can negotiate the payment of the closing costs with the seller. In fact, VA allows sellers to pay all of the buyer’s mortgage-related closing costs and up to 4 percent in concessions — for instance — prepaid taxes and homeowners insurance. So, it’s not out of the ordinary for borrowers using VA-backed loans to have a seller pay most or all of their closing costs. To see if that’s possible in your situation, be sure to keep in close touch with your lender throughout the purchase process to keep up with how much upfront cash if any, you’ll need at closing. And don’t forget, it’s possible to roll your closing costs into your loan.
Closing costs typically include:
- Title services
- Government recording costs
- Credit report fees
- Lender origination fees
- Underwriting fees
- Attorney fees
Many people don’t factor in moving expenses at the front end when they begin their home search, but if you hire professional movers, the costs can be substantial. Even packing and hauling your belongings yourself will set you back a fair amount of money, especially if you’re moving across the country. You’ll find several online moving cost calculators that provide an estimate, and make sure to get more than one quote from a moving company representative. Perform due diligence and check online for reviews.
As your lending professionals, we at Aligned Mortgage are available to gladly answer any questions you might have regarding all aspects of the loan process and costs involved. Please don’t hesitate to contact us with any questions.