Buyers often ask what it really costs to buy a home, what “hidden” expenses they will encounter, when in the process they will encounter those expenses, and how much to expect those costs to be. I want to say up front that there are not any" hidden "costs; once you understand the process, the costs make a lot of sense.
So here are the costs associated with buying a home, explained generally in the order in which you will encounter them.
In the beginning…
Credit Report Fee: the lender may collect a small fee for the cost of running your credit as part of evaluating your application
Down payment: I am putting this at the beginning because you need to have a strong idea of the amount you are able and willing to put down on your home at the beginning of the process. You will provide this at settlement or wire it immediately before.
Congratulations, you just ratified a contract to purchase a home…between now and settlement you will incur the following expenses…
Earnest Money Deposit: In your offer to purchase the property you will include an offer of “earnest money.” In the DC metro area, at least 1% of the purchase price, often a lot more if you are trying to make your offer stronger than other buyers’ offers. Only less than 1% if the buyer has little cash and is financing 100% of the purchase. The purpose of the EMD is to demonstrate intent to follow thorough and provide the seller with the confidence in your offer that they need to take the house off the market in expectation of your intention to follow through with the purchase of the home.
Usually the settlement company or brokerage will hold the EMD in escrow until settlement and once the contact to purchase the home is ratified, you or your agent will have to get you EMD funds to them pretty quickly.
Your EMD will be returned if the contract is voided in accordance with the terms of contract (ie you walk on the home inspection within the deadline for doing so), but if you default on the contract the seller may be able to keep some or all of the EMD. This is why a high large EMD increases the seller’s confidence that you will not just walk away and a very low EMD may lead the seller to believe you are not serious about the purchase.
A final note at this point: once you are approved for a loan, don’t spend much and don’t open up any new lines of credit, no matter how much of a good deal something is: you have been approved for a specific loan payment based on your income and how much other debt you have. If you substantively change that equation, your approval for that loan may be jeopardized! The lender WILL check your credit again immediately before settlement, sometimes even morning of, and if they find new debts or lines of credit that were not there before, you may lose your ability to settle on the property!
Appraisal Fee: usually about $450-475, sometimes more for investment properties. All lenders require an independent appraisal to verify that the property is worth the contract price, since the bank making the loan is making a big investment by doing so. Lenders usually require you to pay this cost up front because they have to pay the Appraiser up front and if you were to decide not to purchase the home, they want to ensure that they don’t have to take this cost out of their own pocket.
Condo questionnaire fee: It is possible your lender may charge you for this at the beginning of the process. Cost vary but are generally between $50-200.
If you purchase a condo using a conventional or FHA loan, your lender is going to pass along the cost of getting specific documents from the condo management association because the lender will have to pay for these regardless of whether or not you go through with the purchase. These documents provide detailed information about various aspects of the community that the lender needs to assess the soundness of investing in a property in that community.
As with appraisals, you are charged during the process for this because it is a 3rd party charge that has to be paid when incurred and if you do not settle on the property the lender needs to ensure that they are not taking this out of pocket.
Inspections: Home inspection costs are based on the size of the property and usually cost between about $450-600. Radon tests are usually an additional $150-$200. If the property is on well and septic, those inspections can easily add up to over $1000.
You may decide to do other inspections as well-mold, structural, etc., depending on what you and the inspector see in the property in question.
Closing Costs: Paid mainly at settlement, these vary based on sales price and loan amount. They include lender fees, settlement company fees, mortgage interest paid at the settlement table for the month in which the loan closes, a survey, title insurance, taxes and fees charged by the jurisdiction, initial escrow for taxes and insurance, etc.
Sometimes we can get the seller to cover some or all of these. The chances of this are better if the home has been on the market for a while or if the seller is highly motivated, and are zero if you are competing with other buyers or buying in a really hot market.
Real Estate Agent fees or commission: Some brokerages charge an administrative fee, usually around $500. Typically the commission to the buyer’s agent is paid by the seller via the settlement process. However, if the listing agent has taken the listing for a below-market fee, they may be offering very low compensation to the buyers agent, leading the buyers agent to require that the buyer make up the difference.
Agents are required to disclose any fees that they charge when you sign the representation paperwork so these should be disclosed to you early on.
Congratulations, you are a home owner…
Mortgage Payment: This will include your principle and interest, plus funds to cover your annual property taxes and home owner’s insurance. The lender will require this “escrow” of taxes and insurance if your down payment is less than 20% of the cost of the home. This is because the lender basically owns at least 80% of the home and has a financial interest in ensuring that these costs are paid.
If you put down 20% or more, you usually are not required to maintain this escrow account but lenders will usually charge a slightly higher interest rate if you decline escrow because the risk to the lender is a little higher, at least from the lender’s perspective.
Note that your first mortgage payment will not be due on the 1st of the month after you close, but the 1st of the month following that month. This is how mortgages differ from rent. You pay rent on the first of the month for that month but you pay your mortgage on the 1st for the month for the preceding month.
For example, if you go to settlement on your new on home any time in June, you will pay any mortgage interest due for June as part of your closing expenses, but your first mortgage payment is not due until August 1st. This makes life a little easier if you need to stay in your rental for a short time; you would not pay rent and mortgage for the same period unless you were still in your rental in August.
That is also why people consider it “less expensive” to go to settlement close to the end of the month: you are going to pay mortgage interest, at the settlement table, for the number of days for that month that you will own the home i.e. the number of days between settlement and the end of the month. So closing on the 29th is going to require less money for per diem mortgage interest than closing on the 2nd.
Maintenance costs: Don’t forget, there are costs associated with ownership that renters do not have. Some owners maintain a home warranty, some just put aside a certain amount each month so they are ready when the roof or the furnace needs to be replaced, and some just say “oh ****” when things come up. It pays, no pun intended, to be prepared for these costs, as they can run in the thousands for the larger items, such as roofs and HVAC.
HOA or Condo Fees: These are fees that you pay monthly, quarterly, or annually to the association that manages the community. The amount is in the listing so you will know what these are ahead of time, although they may rise between the time the information is placed in the listing and the time you being paying this fee. When you get your condo/HOA docs for review after ratification, information about any special assessments being discussed will be in there. Per Virginia law, you have a limited period of time to review these documents and withdraw from the purchase if you determine that there is something in them that makes the property unacceptable to you.
The information in this list pertains to purchases in Northern Virginia. Real estate practices are very local and are mostly regulated at the state level, so the information contained here may not apply in other jurisdictions.