Buying a house may cost more than you think.
When creating a budget for buying a home, it’s incredibly important that you understand closing costs so you don’t fall in love with a dream home beyond your reach.
Many home buyers focus on and crunch numbers around the big expenses like the down payment and the monthly expenses like home loan and property taxes. What often get overlooked are the litany of nagging incidental costs that spring up along the path to buying your home and especially at the closing table.
These costs need to be considered at the outset, especially as you calculate a manageable price range. Good buyer agents know the importance of explaining all of these expenses, but it’s also a good idea to be aware of them upfront and initiate the discussion early in the process.
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Beyond the down payment and monthly mortgage payment, here are additional expenses you should anticipate:
Earnest Money: 1-3% of the purchase offer placed in escrow.
It’s a good faith deposit which indicates the buyer’s intent and willingness to execute the agreement. This deposit is held in an escrow account until successful completion of the transaction and delivered at closing. You’ll get this money back at closing, but it’s important that you understand stipulations for reclaiming this money if the offer does not work out. Trust us, it happens more than you think.
Home Inspection: $300-$600
This is a visual, physical inspection of the structure of a home, mechanical systems, and all permanent fixtures to ensure that the areas and components are safe, secure, and performing properly. Additionally, the EPA recommends a radon inspection and a pest inspection (which could increase the cost by +$200). Before you close, you need to consider whether or not repairs are needed and which party will pay. This becomes an important piece of the negotiation process.
Loan Origination Fee: 0.5-1% of total loan amount depending on size of loan, interest rate options, and credit score ratings.
The origination fee pays for the processing involved in establishing your loan. The work includes verifying information about your income, debt, and employment to determine the maximum size of loan you can support and what your monthly payment can be.
Title Insurance Policy: 0.5-.75% of settlement price.
This fee is paid to the title company for doing a search abstract of the property records for your home. The title company will look at prior deeds, court records, property and name indexes, and many other documents. This is to ensure that there are no liens or problems associated with your ownership of the property. What’s interesting about title insurance is that in Pennsylvania, like most states, the price of the policy is fixed based on the settlement price of the home. That’s right, no consumer choice here. More on that in a future blog.
The home you are buying serves as the primary collateral for the loan. Therefore, mortgage lenders require an appraisal before they’ll provide a loan. A lender will only approve a loan for a property that appraises for at least the full sales price of the home. If you foreclose on the home, your lender would need to sell the property to repay the loan and needs to recoup the difference.
Homeowner’s Insurance: $300-$1,000 annually. (These vary widely. Rule of thumb is to divide the value of the home by 1,000, then multiplying the result by $3.50.)
Homeowners insurance is a package policy. This means that it covers both damage to your property and your liability or legal responsibility for any injuries and property damage you or members of your family cause to other people. You must buy two separate policies for flood and earthquake coverage. Maintenance-related problems are the homeowner’s responsibility.
Philadelphia Realty Transfer Tax: 2.05-4.1% of settlement price.
This is one hefty closing cost that is often overlooked by first time home buyers in the city of Philadelphia. Think of this deed transfer tax as a sales tax on real estate. The Commonwealth of Pennsylvania charges 1% of the settlement price and the city of Philadelphia charges 3% for a total of 4% of the settlement price of the home (i.e. 4% X $500,000 = $20,000). The buyer and seller usually split the cost down the middle with 2% each, but in the case of foreclosures and other situations, the buyer could be forking up all 4%! We know, that’s crazy.
So there you have it. Trust us, we aren’t trying to make you completely exasperated. We want you to be as prepared as possible when you go down the path to buying your first house. Because Houwzer agents earn a salary along with a customer satisfaction bonus (as opposed to traditional agents who work strictly on commission), you know we will always have your back every step of the way.
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