Money Bags

I don’t think I’ve written a post about the cost of buying a house yet. As I sit home broke, I think now is a good time to do so.

I don’t think it’s any secret that buying a house is EXPENSIVE! But for a first timer, and even a repeat buyer, there are extra expenses that may be missed in the planning stages. And as we’ve discovered, rules and customs change, too. Everyone knows you have to pay for the house and down payment, but what other costs should you expect?

In most areas, there shouldn’t be any cost for working with a buyer’s agent, so there is no good reason not to. It is in your best interest to have an expert, non-emotionally-involved person to consult. This is the Realtor that will show you houses and be your guide throughout the process. If you’re selling a house in order to buy another in the same area, you will probably have the same agent representing both transactions. If an agent asks you to pay a fee up front, ask what the money is for and how it will be used. I have heard of agents asking for a retainer type of fee in some areas like New York City, and then the money is applied to the closing costs or earnest money, but this is not customary in most suburban markets. If you’re not sure, get a second opinion before opening up the checkbook. As with any big purchase decision, unless you are already familiar with someone you trust, plan to interview 3 agents before picking one. Get referrals from friends or contact someone who has worked in the area, maybe an agent who’s sign you’ve seen in yards. Some agents specialize in working with buyers, and others with sellers, but many are comfortable working on either side. Ask questions and be sure the person you pick is someone you feel comfortable with. You will spend a lot of time together and get to know them well.

Buyer’s agents receive a cut of the commissions for the sale that will come from the seller’s agent. This would have been negotiated during the seller’s listing process. For example, a seller may be paying 6% in Realtor commissions. Per the contract, an agent who brings a buyer for the property would probably get 3%, or half of the total. A good agent will be more concerned with finding the right home for their buyer(s) than how much they will receive, though keep in mind, the majority of real estate agents don’t receive a penny until closing has been completed and the loans have been applied. Most do not receive a salary or hourly wage! So, be nice!

Earnest money is typically the first check you will write when buying a home. 1% of the sales price is fairly common, while in some areas buyers just use a flat fee, like $1,000. Ask your agent up front what to expect so that you can be financially prepared. You will hand this check over when you submit an offer to purchase to show that you are a serious buyer and as collateral for following through with the contract. Should you not go through with it, the seller is entitled to your earnest money.

When you write up the offer with your agent, there will be some costs to decide on. Title policy and survey are a couple of these costs, and both are usually paid at closing. You will need to decide who pays for what when you prepare the offer. It is fairly common for the seller to pay for the title policy- an insurance policy that protects the buyer from any unforeseen issues relating to the title or deed to the house, like a lien that was missed or previous owner with an ownership claim, etc. This cost is not optional and will typically by 1% of the price. The survey is the plat map of the property showing all buildings and easements that exist. You may be able to use a previous survey, if nothing has changed. The cost for a survey is about $300, if needed, and is customarily paid for by the buyer. A new survey will be required if property boundaries have changed, new permanent structures were built (an addition to the house, tool shed, deck, etc.) or a new easement has been created. An easement is an area of access granted to either a utility provider to work on or maintain service, or a neighboring property for the purpose of access. If your home has a lot behind it, but no road on any side, an easement (like a driveway) would need to be created so that the owner of the back lot can get in and out if their property.

If you are going to ask for an option period, option money will be the second check you will hand over, at the same time as earnest money. This fee is much less than the earnest money. In my area, $100 is common, and this may vary by market and price range of the property. As mentioned in a previous post, an option period is essentially time you “buy” with an additional fee for inspections or other research needed to decide 100% that this is a home you want to buy. If you decide to back at out at any time during your option period, for any reason, all you lose is the option money. Earnest money is returned to you if this occurs.

Always get an inspection! Even if the home is a new build, construction crews make mistakes that could be a huge cost to you later. (See my previous posts about what the crew forgot to put on the house we’re buying!) Ask your agent for the typical range for your target type of property, because this will also vary. Inspection fees are most commonly in the $300-500 range for an average single family home, but expect to pay more for a larger home, older home, and certain types of construction. Pier and beam foundation inspections can be a little higher as well as 2 or 3 story homes, and there are often additional fees for pools or other non-standard equipment. Inspectors will look through the house for any signs of potential problems, like leaky pipes or foundation issues. They are trained and licensed, but are not experts in construction or any one area of building, unless they have previous experience. If they see signs of a problem, you may need to bring in an expert for an additional cost. For example, if the inspector sees cracks in the drywall and doors that don’t close well, you may decide to hire a structural engineer to further inspect the foundation and give an estimate for repair costs. Agents will usually have a handful to recommend, and they are likely to know who is good from experience, or get recommendations from friends. The one our agent suggested was excellent!

If and when issues are found during the option period (there is almost always something), buyers may renegotiate the price or negotiate repairs instead of just backing out. It never hurts to ask for something to be fixed, the worst they can say is no. Note that if you are buying a foreclosed property, or short sale, you may not have this option. Foreclosures are usually sold “as-is” and short sales are sellers in financial distress that probably can’t afford to do repairs. You may still negotiate on the price, but remember most foreclosures and short sales are priced according to the home’s current condition.

Appraisal is the next fee. Expect about $400-500, and again, this can vary by price range and size of the home, or if there are historical value claims, etc. A licensed appraiser will tour the home and provide a written report of the property value. This is good information to have, but is not absolutely essential to the buyer. It is however, required to protect the lender from loaning more than the value of the property, which could lead to being upside down in the loan fast! This used to be a closing cost, but now most lenders will ask the buyer to pay for the appraisal.

Loan fees and closing costs come next. As with the Realtor, shop around. When you have multiple credit inquiries for the same type of credit in a short time period (30-60 days), they count as one. Definitely get quotes or “bids” from 3 lenders and then choose the one you want to work with. Go for a good rate and low fees, but also for good service. This person will have an intimate look at your financial situation, so you want someone you can trust to be honest and explain things to you. There will be some fees for the cost of your loan at closing, in addition to your down payment. If these fees exceed 2% of the loan amount, start asking why! You may see other fees, like a lawyer’s charge, credit report charges, courier fees, etc. You may even see additional fees associated with your loan type. (For example, USDA loans will have an up front 2% charge). These are normal. Watch for “points” which are up-front fees paid to bring the interest rates down. It used to be more common for loan interest rates to include points, but now they are mostly used to “buy” a lower interest rate. 1 point usually equals 1/10% of the loan amount and will reduce the interest rate by 1/4%, but my memory may not be reliable, so don’t quote me on that percentage. In addition, there will be some prepaid escrow charges- the first few months worth of interest and homeowner’s insurance, and primary mortgage interest, when applicable. Look for the “Good Faith Estimate” that your lender is legally required to provide you. This document will show all of the closing costs on an itemized list, and then you will deduct your earnest money and option money, since these are applied toward this amount at closing.

One more closing cost to be negotiated in the offer contract and paid at closing will be the HOA resale certificate, if the home is in an HOA.

I think that is everything, and I will edit to add any others if I think of them.
And then after all that, you’ll probably be paying for movers or to rent a moving truck and buying pizza for your buddies that help. Don’t forget appliances that you may need to purchase right away (refrigerator, lawn mower, etc.) and upgrades, if you’re planning to doing any. By this time, you’ll probably be broke! Good thing the first mortgage payment isn’t due until 60-90 days after closing!

After all is said and done (and paid!) you can get settled and begin my favorite part- decorating!

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