So you have all the money you’ve been saving for a down payment and you’re ready to buy a home. Congratulations! Then you get your final statement (called a closing disclosure) and you need an additional $8,000. What!! Well, this scenario should never really happen if you’ve been well prepared by your lender and REALTOR® but it’s still something that happens all too often.
In this blog post I will break down all of the costs of actually purchasing a home and some things you may not have even considered. Overall, it is extremely important that you work with a lender and REALTOR® that educate you and keep you well prepared throughout the process. Don’t lose the home of your dreams out of an obligation to work with a friend who just got their real estate license or lender that sounded nice over the phone. This is your money and the biggest purchase you will ever make so educate yourself!
The exact amount you will need for closing is not actually calculated until about a week before closing so expect some fluctuation. All of the money you will need to buy a home plus down payment is called the “closing costs.” I have broken these down into 3 categories: Upfront costs, Title Insurance and Mortgage Fees. The typical closing cost is 3% - 5% of the purchase price plus the down payment but it can vary greatly.
Upfront Costs - This is the money that all goes directly toward the purchase of the home. These are not fees but money you are paying toward the home, taxes and insurance.
Down payment – This is the number everyone is familiar with. FHA loans require 3.5% down but there are options for zero and 1% down
Earnest Money Deposit (EMD) – This is not a fee but money you will need up front to secure the home. $1,000 is typical earnest money but could range higher if you are in a multiple offer situation. This is held in an escrow account and applied to your “closing costs” which include your down payment. This is not a fee but you will need it up front. If the sale does not go through for a variety of reasons this is typically returned as spelled out in the sales contract. Consult your agent for more details on this.
Homeowner Insurance – Most loans require a year worth of homeowner insurance up front which in the Ann Arbor and Ypsilanti market typically runs from $1000 - $1400.
Prorated Property Taxes – As a homeowner you will be responsible to pay the up front property taxes to the municipality you are purchasing or reimburse the seller that has already paid these. (Note: In some municipalities the taxes are paid at the end of the year).
Homeowner association dues and start-up fee - This only applies to homes and condos that have a homeowner association. Some of them have a startup fee or require 2 months to be paid up front.
Home inspection – Every buyer should have a private home inspection before purchasing. These run from $400 - $600 and cover a visual inspection of the home. There may be some other specialized inspections you may want to have including pest, radon, sewer line or any other issues that may be unique to your geographic area or recommended to you by the home inspector.
Title Insurance – This protects you and the bank against any defects of title. The title company will perform a search and make sure that there are not any liens on the title such as unpaid contractors or outstanding loans. You will be guaranteed a clear title by the company and issued a Title Policy. If something comes up in the future that was missed during the search you will be protected by this policy. In Michigan the sellers typically pay the Owners Policy and the buyers pay the Loan Policy. These amounts are fixed and can be found here: http://vgtitle.com/rate/
Recording Fees, document preparation and flood certificates – These are all nominal fees which add up to less than a few hundred dollars but every dollar counts!
Closing Fee – The cost to close the transaction. Typical cost is $250 - $350
These fees are all related to your loan and vary significantly based on the loan officer you have chosen.
Appraisal Fee – This is for the bank to determine the true value of the home and in some cases if any repairs (usually safety related) need to be made. The fee is usually $375 - $450 and is non-refundable. If you do not purchase the home this is an out of pocket expense that you will have to absorb. Some lenders make you pay up front and some roll into your “closing costs.”
PMI – Private mortgage insurance. If you are putting less than 20% down on the purchase you will be required to pay for this private mortgage insurance. It may be called by a different name i.e. Mortgage Insurance, lender paid mortgage insurance or PMI. This is a protection for the bank in case the home is foreclosed on. In many cases this fee will drop off after you have 20% equity in the home but with FHA and other loans it will be on for the lifetime of the loan. Some loans require a year worth of PMI up front which could run up to a few thousand.
Origination Fee – What you are paying the lender to generate the loan. $1,000 - $2,000
Application Fee – What some lenders charge to process your application. Check with your lender for estimate.
Credit reporting fee – Nominal charge to generate your credit report
Survey – In some cases a survey of the property may be required