When most people set out to buy a home, they immediately begin thinking about the possibilities…
Where are we going to move? How many bedrooms? Will it have a pool?
It’s only later, and hopefully soon after meeting that their agent discusses the most important question… How are you going to pay for this?
For most, the answer is a home loan.
Home loans are the most common way for home buyers to finance their purchase. Around one-in-three buyers use the FHA loan, which has competitive rates and starts with down payments as little as 3.5% of the borrowed amount.
What most buyers see is the 3.5% and quickly figure, they need $7,000 to buy their shiny new $200,000 home. Which is only part of the scenario. You see, loans cost money to originate. The people who originate home loans (either a Loan Originator or Mortgage Broker) need paid, the costs of getting you approved need paid and so on. Plus add on the costs of closing the sale, title insurance, and recording fees at the court house. Sounds expensive right?
Not so much.
It’s only expensive if you are ill-informed. It’s important to have the “Costs Talk” with your loan officer early on in the process, so you know what your costs are going to be in advance of making an offer. Knowing the costs in advance allows you to confidently negotiate closing costs into your transaction if you cannot afford them out side of the loan. This is why under every circumstance you need to pre-approve yourself PRIOR to beginning your home search.
What costs can you expect?
First, and foremost, I must disclaim: EVERY case is different this is intended as a guide and not a rule. Consult with a licensed Mortgage Consultant about your actual costs of the loan.
Let’s start at the beginning.
Your Agent – In most areas (and I can’t speak for everyone), but I will speak for the Spokane Home Guy Group, we get paid by the seller. You will never incur a cost from us unless in a rare occasion we work out a special representation agreement or special line of service. Generally speaking, we get paid by the seller – so cost to you Zero Dollars.
Your Mortgage Consultant – Mortgage consultants are typically paid on a percentage of the borrowed amount plus a few other fees depending on the type of loan you have and extra “add-ons” you wish to purchase. Ask for a “Truth in lending” statement to outline the costs of he loan and represent it in a comparable format called an APR (more on APR later…) Don’t be afraid to ask directly, “What are my closing costs, and how much should I ask for in negotiating with a seller?” (Should you chose to ask for closing costs). If you are paying your costs directly, it’s important to know this too!
It’s very typical for a lender to collect a deposit from you of around $500 to cover the costs of the appraisal, the credit check, and application fees. This is added as a credit to you when we settle up at the end, and should you negotiate with the seller to pay the closing costs, you can get this money back.
Your Earnest Money – Earnest money is often overlooked until in the heat of writing an offer. Earnest money is just as it sounds. Money that shows how earnest you are in a transaction. In a nutshell, Real Estate Purchase Agreements have contingencies (prenegotiated items of which the result could allow you to terminate the transaction and receive your earnest money back), in the ABSENCE of a contingency, you may terminate but do risk losing your earnest money to compensate the seller for their time. I could write a WHOLE article on Earnest Money alone, if you have questions – call us or email us! As a general rule, Earnest Money is commonly 1% of the purchase price, but could literally be anything. We’ve written offers with 5% to 50% earnest money to show a seller we’re REALLY serious about this property (which bodes well for a multiple offer situation). Once agreed upon and with an accepted offer, the earnest money must be deposited to a trust account either at the brokerage or the closing agent. Budget accordingly!
Your home inspection – Home inspections are optional, but as far as I’m concerned: Required. Generally these run between $275 and $350 for average houses, I’ve seen them more and less, but as a general rule the above is correct. This is paid for at the time of inspection. Sellers do not pay for this and I consider it good insurance for you. If $300 can save you $30,000 down the road… that’s a GREAT ROI. If you chose to have additional inspections (Radon, Structural, Pest, etc. these costs are additional).
Title & Closing – Title and closing are two smaller parts of the cost and are quoted based on the purchase price. You usually have estimates for these in your Truth in Lending disclosure. A good agent (Like us), can estimate all these costs for you.
Escrow, Prepaids & Taxes – Most loans pay your taxes and insurance out of the loan, at the beginning you fund an impound account for these for a period of time into the future then feed the “kitty” incrementally with your payments to keep it full. Initially you fund it at closing with 4-6 months of payments. You also settle up with the seller on taxes, if the seller has paid the taxes for the rest of the year, and you are taking possession of the property in October, you simply reimburse them on the cost sheet for the taxes they will have paid during your ownership.
We know we’ve dumped a ton of information on you all at once. Here’s a QUICK way to calculate these:
ITEMS WE CAN NEGOTIATE WITH THE SELLER
Mortgage Consultant (Loan Costs) + Title & Closing + Escrow, Prepaids & Taxes = ABOUT 3% of the purchase price (We can USUALLY get the seller to pay for these in negotiations!)
COSTS YOU PAY ON YOUR OWN DURING THE OFFER PROCESS
Lender Deposit: $500-$600 (in most cases)
Home Inspection: $275-$350 + any additional inspections you chose.
Earnest Money: 1% of offer (in many cases)
Got questions? Shoot us an email or call us! We’re happy to help!