Buying a home costs more upfront than many people realize. In addition to the down payment, lenders and third-party services charge closing costs, which you must settle on before taking possession of the home. Knowing the estimated cost of these fees can help you know just how much you need to buy a home.
Keep reading to learn which costs you may have to pay when buying a home.
The largest costs aside from the down payment are the closing costs. Each lender charges a different amount and even different closing costs, but in general, you will pay:
- Origination fee – Between 1 percent to 3 percent of the amount you borrow
- Discount points – Between 1 percent and 2 percent of the amount you borrow
- Processing fee – A flat fee that some lenders charge to work on your loan
- Credit report fee – A flat fee charged by the credit bureaus to provide your credit report
- Appraisal fee – A third-party flat fee charged by the appraiser to provide the valuation report
- Underwriting fee – A flat fee charged by the lender to underwrite the loan
- Title insurance fees – A premium you pay for lender’s and possibly owner’s title insurance
- Title search fees – A third-party fee to cover the work the title agent does to ensure a clear title
- Recording fees – A fee charged by the county to record the new mortgage
The closing costs typically cost between 3 percent and 5 percent of the loan amount. Some lenders will negotiate the closing fees, while others will not.
You can sometimes get help with the closing fees with any of the following:
- Gift funds – A relative or your employer can provide funds to cover the closing costs as long as they document the gift and provide a gift letter stating that it’s not a loan
- Seller concessions –The seller can help you with some or all of your closing costs depending on the chosen loan program
- Lender paid closing costs – Some lenders offer lender-paid closing costs in exchange for a slightly higher interest rate on the loan
Real Estate Taxes and Homeowner’s Insurance
In addition to closing costs, you need to pay for the real estate taxes and homeowner’s insurance. If you choose to escrow your taxes and insurance, you’ll need to fund your escrow account as well.
First, the lender must determine the taxes’ due date. Typically, real estate taxes are paid in arrears, so if the taxes are due anytime soon, the seller would be responsible for most of them. But, if you are setting up an escrow account, you’ll need to fund at least two months of taxes in the escrow account. You may also have to add additional funds depending on when the taxes are due.
For example, let’s say you close on the loan in May and your first payment is due July 1st. If taxes are due in October, you would only make three payments before the taxes became due. Add to those three payments the two payments you make upfront and you have five months’ worth of taxes in the escrow account. The lender will need you to pay at least one additional month of taxes to ensure that you have enough for them to cover the tax bill.
As far as homeowner’s insurance is concerned, you must come to the closing with a paid receipt for the next 12 months. If you set up an escrow account, you’ll fund the account with two months’ worth of homeowner’s insurance payments as well.
The Down Payment
Let’s not forget about the down payment you must make on the home, unless you apply for a VA or USDA loan. The down payment required depends on the loan program as well as the amount you intend to put down on the home.
FHA loans require a down payment of at least 3.5 percent and conventional loans require at least a 5 percent down payment. If you want to avoid Private Mortgage Insurance on a conventional loan, you’ll need to put down at least 20 percent on the home.
Keep in mind that you must season all funds that you use for the down payment, closing costs, or to pay the taxes or insurance. Seasoned funds must sit in your bank account for at least two months. This gives lenders time to see if you took out any loans to come up with the money for the loan’s upfront costs. Lenders can’t use any funds that you can’t source and that aren’t seasoned for at least two months.
The upfront costs of buying a home really add to the down payment you planned to make. Plan accordingly to ensure that you can close on your loan without delay. If you plan to use gift funds or negotiate a no-closing-cost loan, you’ll need time to get all of the pieces in motion, so start early to ensure that you can close on your loan on time.