There are a variety of costs associated with purchasing a home that many buyers don’t factor in when they are considering the purchase of their new home. Closing costs add up quickly and can average between 2% and 5% of the purchase price. Your lender, the size of your loan, whether you pay cash, your down payment, points, etc. will affect your closing costs. Below are some typical costs you will incur when you purchase a home.
An appraisal is used to determine the fair market value of your prospective new home based on recently sold homes in the area, size of the home, the quality and construction of the building, location, etc. Your mortgage lender will require an appraisal to ensure the value of the property is equal to or more than the value of the mortgage loan you are requesting. The average cost of the appraisal will be about $500.
Your mortgage lender will request a credit report to ensure your credit is in good standing and that you are not a high risk to lend to. The mortgage lender wants to make sure that you have not overextended yourself and can afford to pay back the loan. Credit checks will run between $30 and $75.
The down payment is the cash amount you will bring to the closing and put down on your new home with the remaining balance of your mortgage. The earnest money you provided at the signing of the purchase and sale contract can be counted toward a part of your down payment. To avoid having to purchase PMI (Private Mortgage Insurance), a lender will usually require 20% of the purchase price as the down payment.
Earnest money is the deposit made by the buyer to the seller at the time the Purchase and Sale Contract is signed. It is a good faith deposit stating that the buyer’s offer to purchase the home is legitimate. Your earnest money is protected by financing and property inspection contingencies. You should always read the contract completely and be aware of how the contract and its contingencies affect the return of your earnest money in case the deal falls through. Earnest money should average between 1 and 2% of the purchase price and is held in escrow by the Listing Agent’s real estate office until the closing.
A flood certification is a document that states the flood zone status of the home you plan to buy. The FEMA maps are examined using the address and/or geographic coordinates of the property to determine if the property is in a flood zone. If the flood certificate determines the property is in a flood zone, then flood insurance will need to be purchased. A flood certification will cost about $9.
Flood insurance provides coverage in case the home is damaged by a flood which is not covered by your regular homeowner’s insurance. It is purchased from the National Flood Insurance Program (NFIP) through your local insurance agent. If the amount offered through the NFIP is not sufficient to cover the value of your home, your mortgage lender may require you to purchase additional flood insurance through a private insurance company. Your policy can cover just the building or the building and your personal contents. The premium is based upon the flood zone you are in, the value of your home, the elevation of your home above the Base Flood Elevation, and whether you want personal content coverage. Your flood insurance premium will run between $1,000 to $4,000 or possibly more depending on if your mortgage lender requires you to purchase private flood insurance to cover the portion not covered by NFIP.
The real estate attorney will prepare the legal documents needed for the transfer of the property, file all the documents with the town and state, and work with the Seller’s attorney to facilitate a smooth transfer of the property. Their role may include reviewing the purchase and sale contract, preparing the new deeds, researching the title, filing the transfer documents with the town and state, executing the transfer of funds, etc. The real estate attorney will charge between $1,000 - $1,700 for their services.
Lender Fees are the fees paid directly to the bank for the origination of your mortgage loan. These fees may include a loan application fee, an origination fee, a tax service fee, a processing fee, a commitment fee, a rate–lock fee, and a points fee. If your deposit is less than 20% of the total purchase price, you may be required to purchase PMI (Private Mortgage Insurance) which is used to protect the lender in case you default on your mortgage payments. PMI would remain a yearly cost until you have reached 20% ownership in your home. Your lender fees will vary depending on the bank but will average around 1% of the purchase price.
A property inspection helps you the buyer be more informed about the home you are considering purchasing. During a property inspection, the home inspector will look over the structure of the building including the roof, foundation, and systems (electrical, septic, heating, HVAC, etc.). Water and radon tests may also be done as well as termite or other pest infestation checks. The home inspector will give you an idea of what may need to be repaired, brought up to code, or corrected before you purchase the home. A typical property inspection will run between $500 and $1,000 or more depending on how thorough a property inspection you request.
Pro-rations are your portion of the fuel, water, sewer, town property taxes, association fees, etc. that the seller has pre-paid and now needs to be reimbursed for. For example, typically for the fuel pro-ration either the fuel provider or the Listing Agent will read the gauges on the fuel tanks, calculate the portion that is left in the tank, and then calculate the cost of the remaining fuel based on the current fuel prices. This is the portion you will be charged at closing. All the other utilities, taxes, and association fees will be calculated in a similar way and you will be charged for your portion at the closing.
These are the fees for filing the appropriate documents with the town and state that record the details about the transfer of the property. Documents such as the new deed and mortgage need to be filed with the Town Clerk. Other documents such as flood certificates and surveys may also be filed with the Town Clerk. The documents are usually about $10 per page. Your attorney will also file the Property Transfer Tax form with the Town Clerk. The Property Transfer Tax is equal to $500 for the first $100,000 (if your primary home) plus 1.45% of the remaining amount over $100,000. Therefore, your Property Transfer Tax is dependent upon the purchase price of your home.
Title insurance protects the buyers and mortgage lenders from defects or problems with a title, and the seller from financial loss caused by defects or claims, such as previous liens or delinquent taxes, when there is a transfer of property ownership. There are two types of Title insurance policies: a homeowner policy, which provides protection to the new property owner, and a mortgagee (or loan) policy, which provides protection to the mortgage lender. These two policies are separate and distinct. If the lender requires title insurance as a condition of making a mortgage loan, it is the lender who is insured, NOT the homeowner, even though the lender’s title policy is usually paid for by the buyer. If the homeowner wishes title insurance, a separate policy must be purchased. Sometimes if both policies are purchased together, a discount in price is offered. Title insurance is a one-time, single premium insurance payment paid at the time of closing. The premium is based on the loan amount and/or the overall purchase price of the property. You can estimate your premium by using this formula $170 for $50,000 or less, $170 + [(Loan Amount/1000-50) x 2.25].
The title search researches the property’s history including but not limited to deeds, tax liens, mortgage liens, easements, etc. Your mortgage lender will request the title search and it will be completed by a Title Company or Real Estate Lawyer. A title search will range between $1,000 and $1,700.
The underwriting fee is the fee the bank charges you for being willing to take the risk of giving you a mortgage loan. The underwriting department of your mortgage lending organization will assess the degree of risk the lender will be taking on before approving your mortgage loan. They want to make sure that your current financial circumstances are capable of handling the mortgage loan debt. Underwriting fees range around $300 - $500.