Updated: Sep 26, 2022
How much does it cost to buy a home? It seems like a "no-brainer," but it's actually an excellent question with an answer that buyers need to be familiar with: Buying a home costs more than the purchase price! Read on to find out about the several costs that are due before closing, as well as a certain amount of funds that a buyer may need to be in possession of for covering closing costs and if making a downpayment. For the purpose of this discussion, we are considering all of these costs to be "upfront."
Downpayments are a part of the purchase price of the home.
If you are like many home buyers, you will be borrowing money for the purchase of your home - in that case, you may also need to make a downpayment.
The amount of downpayment due from you at closing depends on the price of the home and the mortgage product you are using. For example, downpayments can range from 0% for VA and USDA loans, 3.5% down for FHA loans, and 5 - 20+% for conventional loans. There are many other types of loan packages out there with varying amounts of downpayment percentages, so get in touch with a trusted local mortgage broker to find what option works best for your situation and discover how to best leverage your buying power in this market.
If you are looking for a local mortgage broker, I know a few local rockstars that I would love to connect you with!
2. Closing Costs
Closing costs are paid in addition to the purchase price of the home.
Total closing costs for a transaction commonly add up to 3% of the purchase price of the home, and in Washington state, escrow fees (which are only one part of overall closing costs) are split between buyer and seller unless otherwise agreed to or dictated. If you cannot cover your buyer portion of closing costs, negotiations with a seller to cover those must take place. Prior to the market shift in late Spring, this was a very unfavorable and often losing position for a buyer, but in today's market it is being seen more and more. Definitely reach out to me to discuss if you have more particular and specific questions on this point.
So, as the buyer, your closing costs can include: one-half of the escrow fees, loan origination and other fees from the lender, lender's title insurance, homeowner's insurance premium, county recording fees, HOA set-up fees and any property taxes for the year if due or previously prepaid by the seller.
Your downpayment and closing costs must be liquid and available to be paid in-full at closing (not tied up in stock options, bitcoin, bonds, etc), and closing typically happens thirty days after your offer has been accepted. If you are already underwritten by a local mortgage rockstar lender, you may be able to close in as fast as fifteen days after signing your purchase and sale agreement.
3. Earnest Money
Earnest money deposits are considered a part of the purchase price of the home.
Earnest money must be in the bank and available at the time the purchase and sale agreement is executed. It is applied TO your overall debits at closing and is not a payment that is made in addition to the purchase price; earnest money can be applied to the downpayment (if there is one) and/or closing costs.
An earnest money deposit is used to demonstrate to the sellers a buyer's good-faith effort to complete the transaction. It is delivered by buyers to the escrow agent within 3 business days or less after an offer is accepted. The amount of earnest money varies from 1% to 5% of the home's purchase price. If the transaction gets to closing, that earnest money payment is credited toward the purchase price/closing costs you owe on closing day.
If for some reason the purchase does not work out due to a contingency in the purchase and sale agreement that allows the buyer to escape the contract, the earnest money will be refunded to the buyer by the escrow officer. If the buyer, in bad faith, breaks their contract with the seller by backing out of the purchase and sale agreement, the seller gets to keep the earnest money.
When deciding how much money to offer, a larger earnest money deposit can signal to the seller your commitment to honoring your contract to purchase and getting to the closing table by putting a larger sum of your own money at risk. A large earnest money deposit is one tool that can be used to stand out above other offers.
A trend of note that has become widely used in this seller's market here in Western Washington is the immediate release of all, or a portion of the earnest money to the sellers. This practice emerged as a tool used to standout above other buyers in multiple offer situations, putting cash in the hands of the sellers right away. It does come with a great deal of risk for the buyer, though, as recovery of those funds, should the agreement fall through, will be rare and costly. It's not for the faint of heart and it is a risky and assertive move, but, as you can imagine, it has been very popular with sellers.
Will this trend endure as this market moderates from a white-hot seller's market to a warm seller's market - that remains to be seen.
4. Home Inspection Costs
Home inspections are paid for in addition to the purchase price and are due at the time of service.
If your purchase and sale agreement contains an inspection contingency, you will hire a home inspector to perform a general home inspection of the property you are under contract to buy.
A home inspection allows for you to do your due diligence in regards to the condition of the home and its major systems; it is a very important step in the home-buying process that allows you to have independent verification as to what's under the hood of your potential investment. You may then negotiate possible concessions with the seller based on the information given to you from the inspector - the buyer can back out of the contract with their earnest money if no resolution can be achieved between the two parties, or the buyer may back out for no reason at all. It's a powerful contingency.
In the new, more gentle seller's market that we are experiencing right now, more and more buyers are getting under contract with inspection contingencies. This is a positive, yet drastic departure from the more aggressive seller's market from the past two-plus years. Up to May - June of this year, buyers in King, Pierce, Snohomish, and Whatcom counties rarely were getting under contract with an inspection contingency. Buyers who were, did not get much, if anything, in the way of repairs or concessions from sellers - homes for sale just had too many other offers from buyers that were willing to buy in as-is condition with no inspection and no inspection contingency.
Home buyers that were choosing to waive their inspection contingency entirely removed their escape from the contract that would allow them to receive their earnest money back - a risky move, indeed!
Thankfully those situations are easing. Pre-inspections were, and are a remedy of sorts for buyers that want to perform their due diligence in this situation (of waiving the inspection contingency) when competing with other buyers that are waiving their inspection contingency, but a pre-inspection (done before the purchase and sale agreement is executed) will not protect earnest money and does not allow for an escape from the contract for the buyer.
Appraisals are paid in addition to the purchase price and are due at time of service.
If you are financing your home purchase, an appraisal will most likely be in your future unless you are putting down about 30% or more (appraisal waiver!). An appraisal is paid for by the buyer and is conducted for the benefit of the lender to ensure they are not lending more toward the purchase price than what the home is currently worth. It also ensures that the condition of the home meets the requirements of the loan product being used.
Here to Help
So it looks like there is more to buying a home than meets the eye! Downpayment, closing costs, earnest money, home inspection, and appraisal are all elements that factor in to the process. We have learned that there are definitely expenses aside from the amount of money being borrowed that are required to be available to the buyer in order to be a prepared, well-qualified buyer ready to make it to the closing table with ease in this market.
If you are a new homebuyer and need guidance through this unfamiliar territory, I'm here for you!
Not new to buying and selling property? I'm here for you, too!
Let's get started! It would be my pleasure to guide you along in this process - pull out your phone or computer and get in contact today.