Buying a home, common costs
When you are looking at homes online, the sales price of the home listed for sale is not the only cost associated with buying the home. There are many other fees that are associated with buying a house and owning real estate in general. I will help you breakdown these fees and help you get a better understanding of the additional costs of buying a house.
I have broken the fees down into 4 separate sections: Purchasing Fees, Mortgage Fees, Title Company Fees, and Home Ownership Fees. I’ve tried to make it easy so you can browse through and read about the extra fees that you may not be familiar with. Let’s start by taking a look at the main fees associated with purchasing a house.
Make sure that you are familiar with these homebuyer fees and have budgeted for them.
Downpayment - This is the most common fee that homebuyers are familiar with. Typically downpayment expenses run around 3.5% to 5% of the sales price, but there are options for 0% downpayment loans. Some homebuyers believe the myth that you need 20% down to purchase a home. The truth is that there are programs that make it possible to buy a home with no downpayment, if you and the property both meet the loan requirements. The best way to find out home much money you will need for your down payment is to talk to a mortgage lender. You can fill out the form on our loan pre-approval page for Colorado Springs to get this process started if you are at that point now.
Earnest Money - Earnest money is not necessarily a fee, but it is something to be aware of because you will need the funds ready when you put in a contract on a house. Earnest money is basically a buyer’s proof that they “earnestly” want to purchase the home. A purchase contract is a great start, but there needs to be some cash involved to protect the sellers interests while they take their house off of the market. In Colorado Springs, earnest money is usually around 1% of the purchase price of a home. A home priced at $250,000 would typically ask $2,500 for earnest money. This $2,500 is credited back to the buyer at closing.
Closing Costs - This is usually the second largest out-of-pocket expense for a home buyer. I will break down these closing cost in more detail below, but I wanted to add it to this section because it should never be overlooked. Most of the fees involved in closing costs are associated with the preparation of your mortgage.
Moving Expenses - This is an expense that seems to be rising every year. The cost of moving is dictated by the amount of items and the distance that you need to move. It’s not uncommon for homebuyers moving across the country to spend well over $10,000 in moving expenses. First-time home buyers typically don't have as many possessions and can usually move with much less expense.
Home Inspection - The home inspection is technically an optional fee, but I would never recommend skipping this very important home buying step. In most states, our real estate contracts offer an inspection period for the homebuyer to have the property inspected by a professional. The real estate inspector will determine whether there are any problems that need to be addressed before moving forward with the home purchase. In Colorado Springs, this fee is usually around $250-$500, depending on the size of the home. There are also specific inspectors who specialize in certain parts of the home. You may also need to hire an additional inspector who specializes in one of the following industries below, based on the home you are buying:
HVAC, Radon, Termite, Mold, Well Water, Septic, Foundation, Structural
MORTGAGE LOAN FEES
These fees are incurred when using a mortgage to purchase real estate. They are not applicable for cash deals. Mortgage fees are usually the second highest monetary charge to a homebuyer, following the downpayment. These fees can vary from 1% to 5% + of the sales price, depending on your loan type and structure of the mortgage.
Loan Origination Fee - This is the largest fee on the mortgage side. It is the fee that you are paying the lender to generate or “originate” your mortgage. It is essentially the cost that you pay the lender you've hired to prepare your mortgage for closing.
Discount Points - This is an optional fee that borrowers may be charged as a way to pay down the interest rate on a loan. There are many different ways to structure a loan using discount points, so be sure to ask your mortgage lender to explain all your options if you plan on buying down your interest rate.
Application Fee - Some mortgage companies charge a fee to process your loan application, for the time they have invested in order to process it. Loan officers will process hundreds of applications, and many of them may not be ready for a loan yet. This is especially true when lending requirements are more strict.
Credit Reporting Fee - Some mortgage companies will charge a fee for credit reporting when they check your credit. In many cases, this fee is from a 3rd party service that is simply passed on to the homebuyer.
Property Appraisal - In order to ensure that the mortgage company is lending money on a property that is actually worth the price that you have agreed to in the contract, they will order a property appraisal. A professional appraiser will analyze the property to determine its fair market value. If the appraisal comes back reflecting a market value below the sales price of the sales contract, the buyer and seller will have to negotiate a fix for the problem or the deal will the contract falling apart. This appraisal fee is usually passed on to the buyer, since it is a requirement of the loan.
Private Mortgage Insurance - Private mortgage insurance (PMI) is a fee that mortgage companies will charge to protect their interests in cases where they are loaning money for a large portion of the home’s value. In many cases, the PMI will be dropped once a homebuyer’s loan amount becomes less that 80% of the homes fair market value. PMI is usually charged monthly and is an important mortgage fee to research before entering into a loan.
Property Survey - Some mortgage lender are going to require a survey of the property that you are purchasing. They do this as a way of verifying the physical specifics of the property and all the real estate specific items on the land before lending money on the property. Many properties will have an existing survey, and in most cases the lender will accept the previous survey if there have not been any changes to the property. If there is not an existing survey, the lender will require one and this expense is usually passed on to the buyer, unless otherwise specified in the sales contract.
TITLE COMPANY FEES
Title company fees will vary by each state and wether they are paid by the buyer or seller is negotiated in the sales contract. If you are paying cash for a property, many of these fees are not applicable. In the Colorado Springs area, it is common for the seller to pay most of the title fees. We’ll cover all the title fees below as a reference; many local Title Companies websites offer specific estimates.
Title Insurance Fees - The title company will issue a Policy insuring the property against defects as to Title, as outlined in their commitment. Their fees are for all the administrative and document expenses required to obtain the items necessary before they can issue a Policy.
Title Search - The first thing that a title company does once they receive a new sales contract is to perform a title search. This is a process of searching all previous records of the existing title history for the property.
Recording Fees - The title company will record the deed and any other relevant documents with the county recorders office. This fee will usually be passed on to you at closing.
Owner’s Title Policy - The cost of the Owners Title Insurance Policy is a percentage of the sales price, and can be paid for by the buyer or seller, as indicated in the Sales Contract.
Mortgagee Title Policy - The Title Insurance Policy for the buyers mortgage company is also calculated by a percentage of the sales price.
Flood Certificate - This is required in areas where heavy flooding can occur. The fee will vary based on the state.
Escrow Fee - This is the fee that the Title Company charges for their services in processing your file.
Tax Certificates - The Title Company will order tax certificates from the appropriate office to show the payment history and what taxes are owed. The Buyer will pay for the taxes from the date of closing through the end of the year, and they may be included in your mortgage payment.
Document Fees - There are several documents that will need to be prepared for your transaction, these will vary according to your situation but can include the Deed, Deed of Trust, Notice to Purchaser, various Affidavits, and others.
Recording Fees - Some of the documents generated, such as the Deed, will need to be recorded at the County Clerks office, these fees are passed on to the buyer and seller.
COMMON HOME OWNERSHIP EXPENSES
These are the fees involved with owning a home. These expenses can be a surprise to first time home owners if they have previously been renting. Make sure that you are aware of these expense when purchasing a home.
Home Owner's Insurance - This expense is required by your mortgage company because it protects their asset (your home). Home Owners insurance will vary based on the policy that you choose, but expect it to be at least $1,000+ per year, based on the value of your home. It is commonly escrowed into the monthly mortgage payment.
Property Taxes - This expense can vary greatly based on the state, municipalities, and neighborhood of the home that you purchase. New neighborhoods typically have higher taxes. Some states have property tax rates as high as 6% of the homes value.
Home Owner’s Association Dues - This expense is only relevant to properties in neighborhoods with a home owners association. The fee is paid by the residents of the neighborhood to pay for all neighborhood maintenance and operating fees. This expense will vary greatly, based on the amenities of the subdivision or community that you purchase in. Town homes and condos can have much higher fees, because they typically take care of all the exterior maintenance and lawn care.
Property Maintenance & Repairs - When you rent real estate, most of the repairs are covered by your landlord or property management company. When you own real estate, you are responsible for repair costs, so make sure that you have some money set aside to handle these issues when they arrive.
Home Warranties - You can purchase a home warranty as a way to safe guard yourself from repair expenses in the future. Home warranties are extra protection on top of your home owner’s insurance that usually cover smaller items not covered in you home owner’s insurance policy.
Appliances and Fixtures - The most common items that need replacing in a home are appliances and fixtures. Refrigerators, washer/dryers, overs, microwaves, ceiling fans, and lighting fixtures are all usually replaced at some point in time. Knowing the value of these items can be very helpful when considering purchasing a home.
Property Updates - If most of the homes for sale in your neighborhood have granite countertops, marble backslashes, and custom decks, then you will want to have these items in your home when you are ready to sell, in order to insure that you get top dollar for your home. There is an endless list of potential property updates. Do your research and make sure to only update the items that will guarantee a return later when you sell. Don’t overdo it!
Lawn Services - Lawn equipment, landscaping materials, and lawn maintenance can vary greatly based on the property that you purchase. I recommend researching these expenses before purchasing a home to know what you are getting into.
Basic Utilities - Water, gas, and electricity costs can vary from place to place. It is wise to ask for an estimate of utility costs from the owner before purchasing a home it you are concerned about these expenses. Water fees can vary dramatically in Iowa, so make sure that you look into this fee before purchasing a home.