Buyers often need to pay a portion of a home’s value to secure your purchase. This initial payment is known a the down payment. This payment is the amount of money the buyer gives the seller upfront while the buyer secures a mortgage to cover the rest of the purchase price. The buyer will then be paying the mortgage lender back that loan over time. Down payments typically range from 5% to 20% of the purchase price, though there are some loan programs that allow for smaller down payment percentages. The larger the down payment, the less a buyer owes on their mortgage each month and the less interested they will pay over time.
Earnest money Deposit
Earnest money is a deposit made to the seller to show a buyer’s good faith in purchasing the home. This deposit gives the buyer extra time to secure financing and conduct the title search, appraisal of the property, and inspections before closing on the property. The EMD is typically 1% of the purchase price and is usually due within 3 days of the accepted purchase offer. You pay this to the listing office and it is held in escrow and credited back to the buyer at closing or if the buyer backs out due to issues with the inspections or appraisal. However if the buyer backs out for other reasons, the EMD then goes to the seller.
Usually ranges between $400-600. Can be included in your lender’s closing costs or due at time of ordering the appraisal. An appraisal is supposed to be an unbiased professional opinion of a home’s value. Appraisals are almost always used in home sale transactions. An appraisal is used to determine whether the home’s contract price is appropriate given the home’s condition, location, and features.
Averages $250-$500 and paid at time of the inspection.
A home inspection is an examination of the condition of a real estate property. It usually takes place in connection with the property’s sale. A qualified home inspector assesses the condition of a property, including its heating and cooling systems, plumbing, electrical work, water, and sewage, as well as some fire and safety issues. In addition, the home inspector will look for evidence of insect, water, or fire damage or any other issue that may affect the value of the property.
Typically around 2-3% of the purchase price of the home and will be paid at closing. The closing costs are made up of a variety of costs and fees, some of which are:
- Loan origination fees. Fees for processing and underwriting the loan. Underwriting is part of the loan approval process, when the lender checks to see if you’re able to repay your loan based on a variety of factors such as credit history. These fees vary and go to your lender, be sure to understand what these fees are when you choose a lender, some charge more than others.
- Appraisal and survey fees. The appraisal and survey are used to help confirm the fair market value of your home. Fees for these services may vary but are usually several hundreds of dollars.
- Title insurance. Policies for both the buyer and lender are calculated based on the purchase price.
- Homeowners insurance. The first year is generally paid at closing.
- Private mortgage insurance (PMI). If your down payment is less than 20 percent, you may need to pay private mortgage insurance (PMI), which protects the lender against losses if you cannot repay your loan.
- Mortgage points. Also known as discount points, mortgage points are paid directly to the lender at closing in exchange for a lower interest rate on your mortgage.
- Property tax. Usually, six months of advance tax is paid at closing. Taxes vary by location. Keep in mind: After the loan closes, the property may be reassessed and the value could increase along with the real estate tax. If the taxes are reassessed, then the amount the lender originally put aside in an escrow account may need to be readjusted to ensure there is enough to pay the new tax amount.
- Closing or escrow fee. This fee goes to the escrow agent who helps you close. It can vary based on the purchase price of the home.
- Attorney fees. Some states require you to have an attorney. Their fees may be bundled into your closing costs.
- Miscellaneous fees. A number of smaller fees may also be included at closing, from the cost of a credit check to the cost of registering your purchase with the local government.
We hope this helps you understand the costs that may be associated with buying a home, outside of the simple monthly payment that you are signing up for. It is important to prepare yourself for these costs and be sure you are financially able to handle them before you go searching for a home.