Unfortunately there are a few more costs to consider beyond the purchase price.
Earnest Money
Two common fees that many first-time home buyers don’t know much about are “Earnest Money” and Due Diligence Fees. Perhaps you’ve heard the old adage of “putting your money where your mouth is”? Well, Earnest Money is just that – it’s a sum of money submitted shortly after the offer to prove that the buyer is serious about moving forward with the sale. Another intention of Earnest Money is to compensate the seller in the case of a buyer failing to fulfill the contract for any reason. Typically, Earnest Money is refundable to the buyer if one of the following three common contingencies are not fulfilled:
Home Inspection Contingency (or due diligence contingency) – The buyer may choose to back out of the contract before the end of the due diligence period without repercussion.
Appraisal Contingency – If a loan is being used to purchase the property, then the lender will almost certainly require an appraisal since the home will be used as collateral to protect against the risk of loan default. If the appraisal comes in too low compared to the already agreed upon purchase price, then the buyer will be required to make up the difference out of pocket. Unfortunately, sometimes the buyer doesn’t have the money to make up the difference and so the contract falls through.
Financing Contingency – Sometimes a buyer might have trouble getting his lending together. If for any reason the buyer cannot get his funds together, the deal will fall through. This is why it is vital to choose a lender that is responsive and who will help you find solutions if any issues arise.
It’s important to note that there are also other contingencies or situations that might qualify for Earnest Money to be returned to the buyer. However, in the end, a contract is a legal document and it may come down to law to determine what the proper course of action is regardless of standard practices.
In the event that the seller gets to keep the buyer’s Ernest Money, it will be applied to the buyer as a credit at closing, which means that it will be paid towards the property’s total purchase price.
Due Diligence Fees
Due Diligence Fees are paid to the seller in compensation for them taking the home off of the market for as long as the property remains “under contract”. Even if a buyer chooses to claim their right to back out during the due diligence period, say because the home inspection came back with some negative reports, the buyer will not be entitled to a refund.
It is very rare for a buyer to be issued a refund for Due Diligence Fees and this almost exclusively occurs in cases where the seller is in breach of contract.
Like Earnest Money, Due Diligence Fees will be credited to the buyer at closing and these will also be paid towards the property’s total purchase price.
Inspection Costs
There is a lot to consider during the Due Diligence period and some of the important things include scheduling inspections to determine the status and safety of the home.
General Home Inspection (typically $300 - $600)
Pest & Wood-Eating Insect Inspection ($50 - $200)
Roof Inspection ($236 on average, ranging between $75 - $900)
HVAC inspection ($200 - $400)
Foundation Inspection ($300 - $3,000 depending on property size)
Soil Testing / Perc Test for Septic ($450 - $1,400)
Septic Inspection ($150 - $450)
Well Inspection ($250 - $550); Well Water Lab Testing ($100 - $350)
Property Survey ($500 on average; ranging between $100 - $600)
Radon Inspection ($420 on average; ranging between $146 and $716)
Mold Inspection ($300 - $900 depending on the size of home)
Lead Paint Inspection ($300 on average; ranging between $200 - $700)
Asbestos Inspection ($500 - $600 on average; ranging between $200 and $800)
Other Detailed Inspections (if deemed necessary by the home inspection)
Don’t worry, you won’t be required to order the inspections above and I’ll be happy to advise you on which inspections make the most sense depending on the property in question. Inspection costs will be due at the time they are performed and they are to be paid for in full by the buyer. While not applicable in every case, more often than not, if something notable does come up in these inspection reports then it is typically possible to negotiate the necessary repairs with the seller.
Down Payment
While the down payment can be considered a closing cost, most people think of it as a separate sum to consider. Different loan products (conventional, FHA, VA, etc.) require a different amount of equity to be placed immediately within the purchased property. Many people falsely assume that you must put 20% down as a down payment. This isn’t true! In fact, VA loans and USDA Rural loans enable buyers to purchase property for $0 down!
The important thing to remember is that even if the down payment seems like a hurdle to you, there are many down payment assistance programs available and different loan products to consider, which are provided through a variety of lenders. Together, we can almost certainly find something that will work for you!
Closing Costs
One thing that some prospective buyers overlook when starting to look for homes is the price of closing costs. Typically closing costs come out to be around 2% (but they can range between 1-5%) of the property’s purchase price for the buyer of the property. This means that someone buying a 300 K house will budget an extra $6,000 - 15,000 for closing costs.
Closing costs are figured as credits and debits to both the seller and the buyer (depending on who is responsible for paying) and prepaid items will be prorated depending on the portion of the year that the parties will each be owning the property.
The types of things that you can expect to find included as itemized line items are:
The Loan Origination Fee and any Points being purchased (if applicable)
Earnest Money (as a credit towards the total purchase price)
Due Diligence Fee (as a credit towards the total purchase price)
Title Search, Title Insurance & Recording Fees
Home Insurance (may be included in your monthly mortgage payment instead)
Firm Fee (may be used by real estate agents to cover their administrative costs)
Real Estate Agent Commissions (this will be paid out to the respective brokerages)
Property Taxes (prorated)
Rental Property Income (if applicable)
HOA Dues
Negotiated Repair Costs
Other Miscellaneous Third-Party Fees (appraisals and inspections if not yet settled)
Transaction Costs (such as notary and transfer fees)
The necessity to save up for Closing Costs might seem daunting after needing to shell out money for Earnest Money, Due Diligence Fees, Inspections and a Down Payment! Keep in mind that sometimes it is possible to negotiate for the seller to pay some or all of the Closing Costs instead of going down on the purchase price. Not only does that mean less out-of-pocket money for the buyer, but this can also have other great benefits as well, since any excess might be able to go towards lowering the loan’s interest rate with a buy-down!
Please leave your questions in the comments!
*This guide is intended to be used as general information only. It is important to note that the author is a real estate agent and is NOT licensed in law, loan, finance or tax matters. Therefore she cannot give any definitive advice on these topics. If you have any questions about any of the topics mentioned, it is advisable for you to seek out properly licensed professionals so that you can obtain current information that is relevant to your specific situation.
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