Yes, You'll Need More Than a Down Payment: What You Haven't Heard
The truth is, we aren’t taught this stuff in school. And when we start Googling “what are my out-of-pocket costs when buying a home”, information overload and confusion can set in. But hey, you came to the right place for a clear, and direct guide. Sure, you’ve heard about a down payment. Just like when you buy a car. But there’s far more to it. So let’s start peeling back the layers!
Round 1 of Upfront Costs: Going Under Contract on a Home
When you begin looking at homes, you and your Realtor® (if you’re in NC, give me a call!) will sit down and discuss the market and market trends, along with terms that are factored into the offer to purchase contract. Specifically, when it comes to what you’ll be spending upfront, your Realtor® will explain the purpose of earnest money deposit and due diligence fee.
FYI— no money is coming out of your pocket until your offer is accepted on a home. When that happens, you will write a check for both the earnest money deposit and due diligence fee for the amounts you offered in the contract.
There isn’t a set amount for your due diligence fee and earnest money deposit. These amounts are up to you. Keep in mind, sellers are looking for appealing and competitive numbers, especially in your due diligence fee.
Your earnest money and due diligence fee are not in addition to your purchase price. They act as additional down payment monies at closing (YAY!).
Round 2 of Upfront Costs: Time to Inspect the Property!
The day your offer is accepted, you enter into what is known as your due diligence period. This time period can last for a few days or a few weeks, depending on the terms of the contract. This window of time allows you to invite professionals to the property to find out its condition and to ensure that you’d like to proceed with the contract. You want to get started right away. Usually, home inspections are scheduled within the first week or as soon as possible. This costs between $450-$550 depending on the size and type of house. There are other types of inspections along with an appraisal that you will need to pay for at time of service:
$80-$100 termite inspection
$120-$180 radon inspection
$200-$400 lead-based paint inspection (if home was built prior to 1978)
Surveys are not normally required in order to close, but are recommended if you have any questions or concerns about the property lines, structure locations, or servitudes. Prices for surveys vary depending on the location and size of the property. I’ve seen them as low as $750 and as high as $950.
After the inspection and once we have verified you want the house, we inform your lender and they will order the appraisal; which is around $600-$900 (depending on your lender this may be included in your closing costs).
Round 3 of Upfront Costs: It’s Closing Day, Time to Pay Your Down Payment and Closing Costs
On closing day, you will pay closing costs before the house is officially yours. Your lender is the person that knows the final amount that you will need to bring to closing— PLEASE ask for a loan estimate as soon as you have been issued a pre-approval, it is here that you will see a breakdown of what you’re on the hook for. This typically includes your down payment, attorney’s fees, lender fees, and other various fees associated with the purchase of your home. I wish I could give you ballpark numbers for planning purposes, but everyone’s expected down payment, and literally ALL the fees vary. Below are the fees typically associated with closing costs that you are expected to bring to the closing table:
Down payment - this is typically 3.5%- 20% of the purchase price. There are so many factors that go into arriving at the number that works for your scenario. If you want to know more, reach out!
Loan origination fee - this is usually $1,000 to $1,500 but varies depending on your choice of lender. I have a worksheet for you if you’re ready to shop lenders. On it are questions you should ask regarding what their fees are. It is your right to shop around, so knowing what you’re being charged is worth the time investment on your end!
Other fees the lender will need to charge - this includes things like credit report, flood certification, and tax service. The good news is the final number on these is not cringe-worthy. Usually around $100, give or take.
Pro-rated property taxes - seller is responsible for their portion of the year they’ve owned the property, you are responsible for the remainder of the year’s property taxes. What you’re charged for property taxes depends solely on where you live. You pay this at closing, but you can request for this to be removed. If that happens, you’ll get a bill for the year in the mail.
Attorney’s fees - this varies of course, and you can shop around. They will usually provide a fee sheet upon request. This shows the itemization for each step in their process and the cost associated.
Title work fees - this includes title search, title coverage, etc. This could easily run over $1,000 but the final number will be on your loan estimate.
Deed recording fees - yep, you guessed it, this means your name will replace the seller’s name…FINALLY!
Homeowner’s insurance - This number varies, but you can shop providers. You’ll be asked to pay a month or so’s worth at closing which will be placed into your escrow account. You can choose to opt out of paying homeowner’s insurance but you’ll need to pay a one-year premium up-front to your preferred homeowner’s insurance agency to have that removed. This will also decrease your monthly mortgage payment.
Private mortgage insurance or PMI - If your down payment is less than 20% you are on the hook for this. At closing, you’ll only be expected to cover first month. I’ve seen monthly PMI be as low as $60 to as high as $184, it simply depends on your loan and how much you’re putting down.
Pro-rated homeowner’s association fees - what you’ll owe depends on if there’s a fee for joining and any other fees. If you aren’t moving into a neighborhood with a HOA, then this isn’t something you have to think about.
Okay, so, I didn’t hold back on the list of things you will be expected to pay for out-of-pocket. It is unlikely that these fees, in this market, will be covered by seller or rolled into your mortgage loan. I’m sure there is a bit of sticker shock, but I believe it’s better to know the true cost of buying a home before you jump in.