Buying your first home is an extremely exciting time. Browsing through listings, making notes of the amenities you want your new home to have, and even walking through potential homes can be thrilling, but there are things people don’t tell you about, such as hidden costs, when it comes to buying your first home.
After weeks or maybe even months of searching, you’ve found your dream home. You and your real estate agent have sent in an offer and it’s accepted. You’re overjoyed, but wait, what happens now? Technically, you haven’t purchased the house yet, but you will have to start paying for your new home.
Wait, you have to pay for a home you don’t even officially own yet? There are 3 hidden costs first-time homebuyers don’t think about when buying their first home.
Earnest Money Deposit
Before the conversation of closing even comes up, you’ll need an earnest money deposit. Of the 3 hidden costs first-time homebuyers forget about, an earnest money deposit is at the top. An earnest money deposit is at its core a sign of good faith. It’s a sum of money that you pay into an escrow account* that basically says, “Yes, I am serious about purchasing this home, and because I’m serious I’m putting this money aside for it.”
How much is the average earnest money deposit?
Your earnest money deposit will typically be around 1- 3% of the sale price. So if your prospective home is $250,000, your earnest money deposit could range from $2,500 – $7,500.
Do I get my earnest money deposit back?
Good question. The best-case scenario for getting your earnest money deposit back is to have contingencies in place. These contingencies will allow you to back out and retain your deposit.
What does that mean?
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 end up purchasing the home, your earnest money deposit typically either goes to closing costs and or your down payment.
This may seem obvious to some, but there are a large number of people who don’t realize they have to pay for an appraisal.
Before we get ahead of ourselves, let’s start at the beginning.
What is an appraisal?
An appraisal is a process in which a qualified appraiser comes to the home you are preparing to buy and assigns a value or valuation to it. Looking at a variety of factors, the appraiser will confidently assign a dollar amount to your potential home and that is what the home is worth.
How much does a home appraisal cost?
Home appraisal costs will usually stay within a range and vary depending on the state your new home is in. 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 in terms of your appraisal cost.
What is included in the appraisal?
As we mentioned above, the appraiser will come to your prospective home and evaluate the value. Once they’ve completed the appraisal, they will provide you with an assigned value of the property as well as a report that supports their quoted value.
The report includes:
- 360-degree photos of the exterior of the home
- A map of the street and property surrounding the prospective home that was used as comparables to help calculate the quoted value
- 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 the amount you were anticipating to pay for the home. When this happens you’ll be dealing with something known as an appraisal gap.
We’re in the home stretch! (Pun intended)
There is only 1 of the 3 hidden costs first-time homebuyers don’t think about left.
A home inspection is something you definitely want to have done on your prospective home.
What is a home inspection?
A home inspection is a visual examination of the interior and exterior of your perspective home. Typically, a seller and potential buyer will agree to a set amount of days in which the home inspection can take place.
How much does a home inspection cost?
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 thing you can do to prepare is to ask your realtor how much you should have set aside for your home inspection.
Are you present for the inspection?
You can be, in fact, we’d suggest it. Not only will you learn a lot about the home by accompanying the home inspector, but you’ll have a very clear idea about what needs to be addressed and why.
What if I’m not able to be at the 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 very good idea of what will need to be addressed in the home and if it’s a dealbreaker for you 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.
There you have it. The 3 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.
*Escrow account – a protected account, usually held by either one of the agents on the deal, or the title company.
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