The process of Home buying can be stressful and expensive. When they place an offer a buyer will take into account the cost of home and interest.Down payments, new furniture, and moving expenses are the extra fees most people focus on. Many buyers don’t know about the additional required expenses incurred in the home buying process. Knowing how much and when these expenses take place will help you better understand the true affordability of the home you want to buy.
Private Mortgage Insurance
A lender will only finance a government insured loan 100%. They want some equity in the home in case buyers default on their mortgage and the bank has to take possession of the home. If a buyer purchases a home without a down payment or with a down payment of less than 20%, Private Mortgage Insurance (PMI) becomes a requirement on conventional loans. An insurance policy rolled into the cost of the mortgage that the bank or lending institution requires the buyers must obtain in order to get the loan. This fee is added onto the payment until the home value is paid down to 80% or less. At that time, the now homeowner has to refinance the home. Another appraisal is ordered which has to prove you have 20% or more equity in the home.
All lenders require buyers to have a homeowner’s insurance policy in place before they will fund your loan. Homeowners insurance covers replacement/repair in the case of fire, leaks, flooding and burglaries. The lender uses the home your buying as collateral. If you were to default on your loan they would foreclose on your home in order to cover your mortgage. Lenders want to make sure you can replace or repair it if there was a disaster. Insurance covers these things, and it’s available to all homeowners. It is usually an annual charge but most lenders want you to pay in monthly installments and place it in an escrow account. That way, they ensure the money is there when the policy is due for payment.
All states require homeowners to pay some sort of property taxes. These taxes are calculated with each county’s imposed tax rate and the assessed value of the property. What these taxes pay for varies from state to state and county to county. They generally cover the following:
- Public Schools
- Maintenance of Public Roads
- Maintenance of Public Parks
- Government Administrative Costs
- Police and Public Safety
- Public Libraries
- Municipal Allocations
Lenders require taxes to be current with payment when home buying. These taxes are usually required to be paid and deposited into your escrow account monthly. Most tax payments are due bi-annually, but lenders want the money to be in your escrow account when they are due. This ensures the lender that you have the money to pay and that a tax lien will not be placed on the property. If you don’t make timely payments for taxes and insurance you will be in default. Once in default, a lender could start the foreclosure actions.
What is Escrow?
Escrow is an uninterested third party that makes sure the contract obligations have been carried out. They collect bills due at closing and prorate expenses such as property taxes, to the day prior to closing. That way the buyer is not paying for any of the seller’s time when owning the home and the seller is not paying for any time the buyer has taken possession. Escrow arranges for signatures on the final forms and coordinates with the lender on mortgage documents. Once all documents, forms and money are accounted for escrow will record the closing documents with the county. Once recorded, escrow will disperse all the funds to the appropriate parties to the transaction.
Title Insurance or Attorney State
The Seller passes the title of a home to the buyer by transfer of the deed. The deed is a recorded document that clearly states who owns the home. When home buying, an uninterested third party will be valuable when closing the transaction properly. An Attorney’s office or Title Insurance company will perform the closing and transfer of property. Their job is to ensure the property is being transferred free of all liens and encumbrances. The office will have an escrow department in the same facility. Escrow will also facilitate the closing by bringing both parties together for a closing. They make sure all bills are paid by the correct party. Escrow will then oversee that the lender’s documents are signed and recorded. Only then do you have a closing of a transaction. Buyer and Seller both pay a portion of the title insurance.
The appraisal is usually paid up front by the buyer to the lending institution. An appraiser determines a house’s worth based on its current condition, upgrades made, and the location of the home. This value is used primarily to ensure the lender you are not overpaying for the home or that it does not need any major repairs like a roof or other defects. A lender will only lend their agreed percentage of the purchase, based on your purchase price or the appraised value, whichever is lower. You want your appraisal to be more or equal to your contract purchase price. An appraiser is not an assessor. An appraiser works for the bank, an assessor works for the county. You want your appraisal to be high and your assessment to be low.
Loan and Origination Fees
Banks provide substantial time, effort, and work into creating a mortgage. This work is not done for free. These fees will vary from lender to lender. Lenders need to provide a good faith estimate which discloses all of these fees. The lender fees will be the largest portion of the buyer’s closing costs. Sometimes the buyer and seller will negotiate these fees into the offer as part of the full loan amount and then documented on the closing statement as seller’s contributions.
Credit Report Fees
Lenders must have the most up-to-date version of a buyer’s credit report, and it’s not free. The buyer cannot secure a loan without it is because lenders must verify the buyer’s identity as well as their financial history. Lenders want responsible buyers only. They don’t lend money to those who have a negative credit history filled with late payments, judgments, unpaid bills, and collections. The buyer pays for the minimal credit report fee early on, during the mortgage application process
Document Preparation Fees and Recording Fees
Another part of the buyer’s closing cost is the document prep and recording fees. Some homes have more documents to get ready, such as a condo. When buying a home, in a Condo complex you also need to acquire the resale certificate. Unless stated in listing this will be a Seller’s expense.
Home Inspection, Well Inspection, Septic Inspection
You will want to have a home inspection on your purchase. You will take away a wealth of knowledge about the home your buying from these inspections. The buyer pays for the home inspection, usually at the time of the inspection. Your lender will require an additional inspection if the home shows evidence of or if the area is prone to mold, termites or other pests. If the property has a well or septic system you will want those inspected prior to closing as well. Typically these inspections are seller’s expense items and to be provided to the buyer.
The Home Buying Process Fees
The fees can add up when home buying. Depending on the loan type and lender, the fees will vary greatly. A knowledgeable Realtor along with a reputable lender can walk you through all these fees. They can also explain how to reduce your out of pocket expense in the process. You will find these two resources are valuable in the process to a smooth transaction and close.