There are 6 home buying costs that buyers should be aware of when preparing to search for their new home. These costs can be significant so you want to take them into account when starting your home search.
- Down payment – The days of no down payment are largely gone. Lenders expect you to have some “skin in the game” when purchasing a home. Expect to need a minimum downpayment of 3.5% for a FHA loan. So, for a home that costs $150,000, this would be $5,250. Conventional loans will require down payments ranging from a minimum of 3 to 5% . Although the loan product will define the minimal down payment needed, keep in mind that a higher down payment will lower your monthly mortgage payment.Note also that there may be down payment assistance programs available. Your lender should be able to advise you on the availability of these programs.
- Earnest Money – Once your contract is accepted, you will be required to make a “good faith” deposit of generally 1-2% of the purchase amount. This deposit is usually held by the seller’s broker in an escrow account. At the closing, this deposit will go towards the down payment needed to purchase of the home. The purchase contract will usually have contingency protections to ensure that this deposit is not lost by the buyer in case the purchase does not go through. These contingencies generally include an inspection period, attorney review and mortgage contingency. The contingencies should be written in to the purchase contract so make sure how they are handled in the contract used for your offer.
- Closing costs – Closing costs for buyers include such expenses as attorney and appraisal fees, loan fees, title costs, property tax and insurance escrow. Expect this to be 3-6% of the purchase price. Buyers often request that the seller either partially or completely pay for these costs but that is not a guaranteed outcome. The seller has the right to refuse the request since this will reduce their net proceeds from the sale.
- Appraisal – The lender will request an appraisal to be done as part of the process to approve your loan. The purpose of the appraisal is to give an independent opinion of market value for the home. The lender will want to make sure that the purchase price is consistent with the current market value for the home. The cost for the appraisal generally ranges from $350-500 for a single family home. For a multi-unit property, the appraisal cost will be higher.
- Home Inspection – The buyer should want to get a home inspection for the property they are considering purchasing. The inspector will make sure that the mechanics of the home (roof, foundation, furnace, plumbing, etc.) are in good condition. The inspector will also take the buyer through the house to address any other functional concerns they should be aware. Inspections generally range from $300 – 500 (higher for multi-unit properties). The home inspection report generally operates as the central document when negotiating with the seller for repairs.
- Attorney Fees – In Illinois, the buyer will generally have attorney representation for their purchase. An attorney in Illinois is not mandatory but it is highly recommended. This is a legal transaction involving a lot of dollars. Attorneys are involved in review of the contract and/or addendums, negotiation of issues and resolution of any title issues. They also prepare the closing HUD and explaining the bulk of legal documents needed to be signed. Generally, expect this to be $400-500. Attorney costs are often included on the HUD and paid as part of the closing costs.
All of the costs above are paid out of pocket as part of the home buying process. They are separate from the amount financed with the mortgage. Knowing what these 6 home buying costs are upfront may reduce some of the unknown in the overall process.