Planning Finances For First Time Buyers

Today I want to talk to first time home buyers or home buyers who haven’t bought in a while about all of the different times in the process that you will need to pay for different things like fees, earnest money, and other charges, so that you can be prepared and get your finances in order and planned out. This way you’ll know what fees and payments to expect before closing day. Many of these extra expenses are dictated in your contract and will have very strict deadlines, so if you miss them you could lose the house or lose some money. Watch or read on to learn about all the extra expenses to expect when buying a house.

Earnest money and option check

The first time you’re really going to need to pay anything is when you get a home under contract. As a buyer, you typically don’t pay your agent (they make their money through commission at the end of the sale). Some lenders will have a small fee that they may charge you to run your credit to get you pre-approved, but this is not super common. As soon as you find out you’re under contract, you have three things you really need to get done – earnest money, option fee, and inspection.

Earnest money is a percentage (typically 1% of the sales price, but check your contract to be sure) that you pay to escrow – this is you paying to the seller to show that you are serious about the sale. This is something the seller can hold so that you can’t just walk away at the last minute or something.

The option fee is usually a pretty small amount of money ($100-300), which is the amount of money that you’re paying to the seller so that you can have the option of walking away from the purchase for a certain number of days (usually 5-10 days), called an option period.

You will pay the earnest money and option fee directly to your title company, and most title companies will accept both of them together. You may or may not have to write separate checks for the EM and Option fee, so check with your title company. Typically, you have options on how to pay – check, cashier’s check, money order or wire transfers are all commonly accepted. The important thing on the EM and option money is that you only have three calendar days to get this done in order to hold the contract. If you are out of town and will be wiring money, you’ll need to do it at the soonest possible moment to avoid any miscommunications or time zone issues.

Home Inspections

The inspection is when you get a home inspector out to take a look at the house to see if there are any issues you need to be made aware of that might affect the value or functionality of the home to you. It is really important that you get your home inspected and is always money well spent. This typically costs between $300 and $500, depending on the inspection company, the size of the home, and if you need any specialized inspections. You will pay this directly to the inspection company.

Appraisal & Survey

After the option period is over and you’ve affirmed that you’re still going to buy the home, you’ll come upon a few other things you may need to pay for. Unless you’re paying cash, you’ll need to get the home appraised to satisfy your mortgage company’s underwriting requirements. The appraisal fee is usually between $450 and $600, and you may need to pay a little more for a rush fee. Most lenders will have you pay this by credit card online or over the phone. Sometimes it can be put in with closing costs, but this is not typical.

You may or may not have to pay for a survey, and it will be stipulated in your contract whose responsibility it is, so read closely. If it is your responsibility, you can expect it to cost around $350-500. Again, this may be able to be included with closing costs, but I would prepare to pay for it yourself before closing just in case.

Everything Else

Depending on the neighborhood of the home your are purchasing, you may have to pay to Homeowners Association documents. I can’t even really tell you a price range on this because the vary wildly. I get really frustrated at these HOA documents because sometimes they’re literally just emailing you a .pdf and charging you $500 for it, so be prepared with a few hundred bucks if you’re going to have to deal with the HOA. This is another fee that the responsible party is dictated by the contract, so read closely to see if you or the seller are responsible for paying this. Ordering and paying for HOA docs differs by neighborhood. Sometimes they have a great website where you can just pay online and get them in an email, other times you have to call and have them mailed to you. This is kind of unpredictable, so be ready to be a bit inconvenienced when dealing with HOAs.

Closing Costs

This is where the bulk of the money you’re going to have to bring is going to come in for most transactions. After you go under contract and get through the option period, you can ask your lender to give you an estimate of the closing costs for that particular home. Because closing costs are very property specific, it is difficult for lenders to give you a good idea of closing costs before you choose a property.

Closing costs include property taxes (which can vary a lot depending on weather or not the sellers have paid them for that year), home insurance, escrows, HOA fees, title company fees, and other miscellaneous fees like recording fees, document fees, attorney fees, etc. None of these fees except the title insurance are very much individually, but they add up.

Lender fees are going to vary quite a lot, and that is one that a lender should be able to give you up front. They should know how much their loan origination charges are going to be, whether they’re going to charge you points or a fee, and they should be able to help you predict what you’re going to need for that.

The Settlement Statement

The title company will send you a settlement statement (which can be called something different, depending on the company). It may also be called an ATLA or HUD statement, a closing statement, or a closing disclosure. In this statement you will see a table where there is a column for the seller, a column for the buyer, and the charges and who is paying each one. It is typically a two page spreadsheet type of document. You’ll want to look over this very carefully beforehand to make sure there aren’t any mistakes. It is not uncommon to see mistakes on these, so be on the lookout. This is something that your agent should be helping you with.

At the bottom of the statement is your cash to close, which is the total that you need to bring to closing. Keep in mind that the earnest money you paid at the beginning of the process is deducted, so your closing costs are lowered by whatever your earnest money is. You can either wire the cash to close amount to the title company or you can bring a cashier’s check to closing with you. You cannot bring a personal check, and the cashier’s check must be drawn on the account you used to qualify you for the loan. I like to always bring a personal checkbook with me to closing as well, just in case there are any places where the title company was off by a few hundred dollars or something. They will accept a personal check for small amounts like that.

If you are going to wire money, always call the title company from a phone number that you find on their official website that you know is definitely the title company. When you call, you can check the wire instructions before submitting the wire because there is a lot of wire fraud in real estate transactions. Read more about avoiding wire fraud here.

Finally, it is important to understand your bank and how long it takes them to do different transactions. If you’re going to wire money at any point, you need to make sure that you understand how your bank’s wire process works. Be sure that they allow wire transfers, how much time they’ll need to process it, and how quickly you can transfer money between your savings and checking account. You wouldn’t want to delay your closing and endanger losing the house because of a banking glitch.

Final Thoughts

In addition to the tips and timeline above, I always like to tell my new clients to order a book of checks if they don’t already have one. This makes life a little easier during the whole process, as you’ll always have them ready to go.

When searching for a home and figuring out what you can pay, don’t forget about these costs that go along with it. Budget for them and be prepared for things to change and need to be handled quickly.

Did I miss anything? Would you add anything else to this list? Let me know in the comments.