Out-of-pocket costs when buying a home

The Costs of Homebuying

In the process of buying a house or condo, there are generally three times you can count on getting out your checkbook.

  1. Making the Offer/Earnest Money – You’ve found what you hope will be your new home and have decided to submit an offer. To show the seller you’re serious about purchasing the home, you’ll need to make an earnest money deposit. This amount is typically 1-3% of the purchase price, and is usually submitted to your agent when the offer is made or (at the latest) 2 days after the seller accepts your offer. If the offer isn’t accepted, the earnest money is returned to you. If the seller accepts, the money is deposited in a trust account where it’s safely held until closing, at which point it’s applied to your closing costs or refunded to you (the latter if you finance your closing costs as part of the mortgage or if they’re paid by the seller). And if along the way you decide the home isn’t right for you, there are several ways you can legally terminate the offer and get your earnest money back. (I feel another post coming on…in the meantime, contact me or ask your agent for details.)
  2. The Inspection – I would never buy a home without first having it inspected, and I counsel my clients to do the same. Inspectors look for problems with the home’s major systems including plumbing, electrical, roof, foundation, siding, etc. and recommend remedies for any issues they find. The cost depends on the home’s total square footage – approximately $200-250 for a small studio condo up to $350-400 for a 3,000 sq. ft. house. Get referrals for good inspectors from family, friends, and your agent. Increase your chances of getting the seller to fix what’s really important by prioritizing what you ask for. (Don’t expect a seller to fix every item in the inspector’s report, especially when buying an older home. If you do, you may find they won’t agree to fix anything.) Issues like water in the crawl space, a leaky roof, presence of rodents or other pests are major issues that should definitely be addressed.
  3. Closing costs – “Closing” is when the ownership of your new home is officially transferred from the seller to you. Sellers will sometimes agree to pay these costs (usually 2-3% of the purchase price), especially in a buyer’s market. These costs can be generalized into three categories:  
  • what you’re charged by your lender for borrowing the mortgage money (approximately 1-3% of the loan amount);
  • what you’re charged by your lender for establishing the loan (this includes appraisal fees, mortgage insurance premiums, prepaid property taxes and loan interest);
  • and what you’re charged for title insurance, deed transfer and recording. (Title insurance costs pay for the search of public records to determine if the property is free from any other ownership or liens. Transfer and recording fees cover the transfer of taxes and the legal recording of the deed with the appropriate governmental agencies.) 

If the seller is not paying your costs and you’re not financing them as part of your loan, your earnest money deposit will be applied toward them at closing. The difference between your earnest money deposit and total closing costs will represent either additional money you’ll need to bring to the closing table or a refund you’ll receive after.


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