The Hidden Costs of Buying a House
Buying a home is an extremely exciting time. Browsing through listings, making notes of the amenities you want, and even walking through potential homes can be thrilling. But there are things people don’t tell you about, such as hidden homebuying costs. That’s right, even before you buy your house, there are costs involved before you can claim homeownership. It can be daunting at first, but with a good real estate agent, you should be well-prepared for what’s ahead.
The Hidden Costs of Buying a House… even before You Move in!
First-time homebuyers are often shocked when they find out how much money they pay out of pocket even before the home purchase is complete. The home buying process involves a lot of checks and balances, fees, taxes, and more fees. Oh joy! But no matter what the costs, the overall financial benefits of owning a home end up winning in the form of growing equity. So, hang on tight, you’ll get through these fees and see the other side.
1. The Earnest Money Deposit
The earnest money deposit, better known as the EMD, hits you fast. Once you make an offer on a home, the seller wants some collateral to show how serious you are about buying. At its core, it’s a sign of good faith. It goes straight into a protected escrow account that either the title company or seller’s agent holds onto.
The average cost of this deposit is usually 1-3% of the house’s listing price. It’s forfeit if you walk away from the sales agreement without just cause. So, if your prospective home is $250,000, your earnest money deposit could range from $2,500 – $7,500.
Can I get my earnest money deposit back?
You can get your EMD back when you walk away from a sale under protected reasons. Let’s use the home inspection as our example. The home inspection/due diligence period is typically 7-12 days. During that period, you can back out for any reason and get your money back. Generally, you’ll also have a financing and appraisal contingency. You can back out for those reasons within the window of time and get your money back.
But if you simply change your mind after the designated period, you lose the money. If you purchase the home, your earnest money deposit typically either goes to closing costs and or your down payment, reducing your loan amount marginally.
2. The Appraisal
The appraisal is a process in which a qualified appraiser comes to the home and values it. Looking at a variety of factors, the appraiser will confidently assign a dollar amount to your potential home. It’s much like a comparative market analysis.
Home appraisal costs depend on your state and market. Your realtor will be able to answer any questions you may have when it comes to appraisals. That said, if you’re curious to know, one of our favorite tools is HomeAdvisor’s appraisal tool. Simply type in your zip code and it will give you a rough estimate of what to expect.
After the appraisal, the appraiser will provide you with an assigned property value and a report that supports this decision.
The appraisal report includes:
- 360-degree photos of the exterior of the home.
- A map of the street and property surrounding home and comparable properties.
- Public tax records.
- Market sales data.
- Public land records.
- An explanation of how the square footage of the home was calculated.
- A rough sketch of the outside of the prospective home.
If the appraisal comes in at the listed price, the seller of the home did well when quoting their home for sale. If the appraisal comes in above the listed price, you did well as the buyer. Even with the home appraising over ask, you’ll still only have to pay the agreed-upon price.
Where things can get complicated is when the appraisal comes in lower than your offer sale price. When this happens, you’ll be dealing with something known as an appraisal gap. There are ways to get through a gap that usually involves some compromise on either side.
3. The Home Inspection(s)
A home inspection is a visual examination of the interior and exterior of your future home. Typically, a seller and buyer will agree to a set number of days in which the home inspection can take place.
Depending on where you are in the nation, the cost will vary. Prices in certain cities like Detroit, MI can be around the $325 – $400 range while larger populated areas like New York City can begin at $1,025. The best way to prepare is to ask your realtor how much you should set aside for your home inspection.
We recommend that you are present for the home inspection. Not only will you learn a lot about the home by accompanying the home inspector, but you’ll know what needs to be addressed and why.
- Tip: If your new home has a well/septic system, then you may also need to pay for a radon and well/septic inspection. Though not required by law in all states, most lenders require that you conduct this test anyway. Also, homes with a basement often require a radon test, and certain states require it. Radon testing averages $300 and well/septic tests can cost up to $650.
What if I’m not able to be at the official home inspection?
The home inspector will prepare an inspection report, usually, 24-48 hours after the inspection is complete. It will include detailed notes, photos, and recommendations for any issues found. The quick turnaround time is key as it allows you to meet the deadline agreed upon by you and the seller.
Once the home inspection is complete, you now have a good idea of what you need to fix to complete your purchase. Many times, if something needs to be addressed, for example, the home’s HVAC (Heating and A/C Unit) system needs to be replaced, you as the buyer can go back to the seller and negotiate. In that case, having the current owner replace the system and or providing funds for you to do so would all be possible outcomes from a negotiation.
- Helpful tip: If a home warranty is not included by the seller, it’s beneficial to add one into your initial offer. A home warranty can be purchased by the buyer or the seller and helps to cover any surprise costs that may or may not come up in the first year of owning your new home.
4. Closing Costs Galore
So, you finally made it to the closing table after paying for an appraisal, a home inspection or two, and writing an EMD check. Now, you’re in for the final stage of unexpected costs: all the fees at the closing table. Thankfully, your mortgage lender should make all the costs transparent in a line itemed loan estimate when you’re clear to close.
Every lender has their own process for how they charge fees, so you may see some lenders split up the origination fee into a processing fee (for reviewing your application and assembling documentation) and an underwriting fee (to determine if you qualify for the mortgage loan).
- Down Payment: This amount can range widely, from nothing at all with a VA loan to over 20% if you want to get ahead of the game and pay down mortgage points.
- Appraisal Fees: If you paid for this, they’ll take this off your expenses. If you didn’t, it gets rolled into your loan. The same goes for any other inspections like pest inspections.
- Closing or escrow fees to the escrow agent.
- Title search and other related fees like title insurance.
- First year’s cost of Homeowners insurance.
- Loan origination fees: The fee lenders charge to initiate your loan, which is usually between 0.5-1% of your total loan amount. If your lender doesn’t charge this fee, then you may have a higher mortgage payment since they tend to charge higher interest rates.
- Property taxes for your new home, which should be for the first six months.
- Private mortgage insurance (PMI): If you pay less than 20% of your home’s purchase price, you will need to pay this additional fee.
- Other miscellaneous charges like attorney fees or school taxes (if applicable, ask your real estate agent if they apply to your house). Tax rates vary according to where you live, so it’s best to ask all the details to avoid surprises.
While you still have over a month before your new monthly mortgage payment starts rolling in, the additional costs of moving are now in play. Moving trucks, storage units, and many fast-food trips are in your future long before your first homeowner’s association payment. This should be budgeted in your personal finances as another cost of homeownership.
The Hidden Costs of Buying a Home: The Bottom Line
There you have it. The hidden costs first-time homebuyers don’t think about when buying their first home. Overall, there are a few things to consider before making an offer on a home. If you’re serious about purchasing a home, saving up for upfront costs is always a good idea. Chances are you’ll see multiple houses before finding your dream home, but if you’re prepared for your earnest money deposit, appraisal, and home inspection things will go much smoother for you.
Alicia Persson is a real estate content/SEO writer at Marketplace Homes. She has several years of experience working in real estate teams that specialized in investments and property management. Before she joined Marketplace, she was a freelance writer for 7 years, leading to a specialization in real estate and home living content for boutique digital marketing agencies. During her writing years, she learned the basics of SEO and gained experience writing for many different clients, making her highly versatile at creating diverse content.
She is a proud University of Virginia master’s graduate and enjoyed her undergraduate years at the University of Mary Washington. When Alicia is not writing, she plays keytar and sings in a local 90’s rock cover band, or she spends time with her amazing family.