You’re ready to buy a new home and it’s time to get your financial ducks in a row. A down payment and mortgage are a given — you may even know you’ll need proof of homeowners insurance up front. But are you prepared for the additional costs associated with buying a home that can show up when buying a house?
In most cases, you’ll need to have cash on hand to cover the earnest money, down payment, taxes and all the various closing costs when the time comes to sign on the dotted line. Let’s take a closer look so you can avoid those out-of-pocket surprises on your way to becoming a homeowner.
Purchase your new home like a pro
Our first-time home buyers guide walks you through each step of the house-purchasing process so you know what to expect.
What are the estimated costs associated with buying a house?
Buying your dream home can be a lot more complicated than just applying for a mortgage. You’ll find hidden fees when buying a house can add up quickly, if you’re not ready for them. Between the money you’ll need for closing and the down payment alone, you’re probably going to be dipping into savings. And because life can be full of surprises, having at least 2 month’s mortgage payments in reserves is also a great way to handle the unexpected.
We’ve put together this list of costs associated with buying a home that help you prepare for closing day.
Home sale price | Closing costs (2% - 5%) | Down payment (3% - 20%) | Emergency fund (2 mortgage payments) |
|---|---|---|---|
$250,000 | $5,000 - $12,500 | $7,500 - $50,000 | $2,300 |
$650,000 | $13,000 - $32,500 | $19,500 - $130,000 | $5,800 |
$1,000,000 | $20,000 - $50,000 | $30,000 - $200,000 | $8,900 |
What are the home-buying fees charged by my lender?
Since the lender is going to be financing your home purchase, it only makes sense that they have a few fees, on top of interest. Not all lenders are the same, so some of the fees associated with buying a house might differ, too. This list provides a nice snapshot of typical fees to help you get ready for closing day.
Here are some of the fees when buying a house.
Application fee
This is an overarching term that may cover a lot of individual fees that come into play with the process of getting a home loan. It’s a great idea to ask what this fee covers and get an itemized list of the charges when buying a home.
Appraisal fee
The lender’s goal with a home appraisal is to learn the value of the home and if it’s in line with the asking price or the agreed upon purchase price. This is their way of making sure they have a sound investment in your mortgage.
Credit report fee
This home fee is paid to the credit reporting agency so your lender can get your records and credit report.
Flood fees
It may be necessary to have a flood assessment done to determine if your home is in a flood plain. If it is in a flood plain, there may be flood insurance fees as well.
Home inspection fees
Some states require a home inspection, and some are optional. If it’s required in your state, your lender will most likely manage this charge and payment. If it’s not required by your state but you still want one, you’ll have to take care of hiring and paying the inspector.
Another home inspection fee you may run into is a pest inspection fee to make sure the house is free from termites and other destructive critters. Termites tend to be more active in the South, Southeast, West and Southwest, which is where you’ll likely encounter this home-buying fee.
Similarly, lead paint has become a big issue in any home built before 1978. Some lenders require lead paint inspections and possibly remediation on older homes.
Loan origination fees
This is sort of a catch-all phrase that covers additional work and services done by the lender through the course of the loan process. Ask for an itemization of the origination fees so you can keep track of how much you’re being charged during the home buying process.
Mortgage points
One way to lower your mortgage is to “buy” points. One-point costs 1% of your mortgage amount. How much of a discount that gives you on the interest rate depends on your lender. This is optional and not all homeowners decide to purchase points so this associated home purchase fee may not be an issue for you.
Private mortgage insurance
Private mortgage insurance is typically called PMI. This is an additional insurance policy that most lenders require if you cannot afford to pay a full 20% down payment. Once you have the 20% in equity you can ask your lender to remove this insurance. Don’t be surprised if they ask for the first month’s PMI at closing.
Underwriting fees
There are processing fees for the cost of evaluating your loan and these are called your underwriting fees.
What are closing costs?
If you’ve heard the term closing costs, then you know there are certain fees you’ll have to pay when you close on a new home. But what are those closing costs? Some of the fees you pay at closing are the lender’s fees we discussed above, but there are some other costs associated with buying a house you may encounter at closing that can make a big difference on your bottom line.
Do you have the funds to close on your new home?
Our closing costs calculator can get you an estimate of the money you'll need to purchase your new home.
Closing Fee or Escrow Fee
This is paid to the title company for handling the home closing as a third party.
Title Search Fees
This search is done through legal records in your area to make sure there aren’t any unpaid liens on the property before you buy.
Title Insurance
Sellers pay the majority of title insurance costs but there is a portion that protects the buyer and, fairly enough, that’s the buyer’s responsibility.
Recording Fees
The transaction will need to be reported to your city and county. While the title company will handle that for you, they do charge a fee for this service.
Transfer Title and Deed
The paperwork required to transfer the title and the deed will be drawn up by the title company and will be explained at the closing. There is a fee for this service when you buy a house.
Taxes
The property taxes will be prorated so the buyer and seller will only pay for the portion of the year they’re in the home. This is all figured with your closing documentation and the associated costs are handled at this time.
Homeowners Insurance
You will need to prove that you have homeowners insurance lined up before the purchase can go through. An important point to keep in mind is that the minimum requirement for your loan may not be enough insurance and could leave you unprotected should something happen. Check with your American Family Insurance agent to make sure you not only have enough insurance for the closing but enough to give you all the protection your new home deserves.
Realtor Fees
If you use a realtor, they typically are paid a percentage of the sales price of the home. The going rate is somewhere between 6-7% and the amount may be split between buyer’s and seller’s realtors.
Attorney Fees
An attorney is not always required for a real estate transaction and the fees may be paid at a different time, depending on the situation. But if one is involved, don’t forget to plan for this charge when purchasing a home.
Courier Fees
You may get a break here and not have courier fees during the home buying process, but there can be a last minute rush for paperwork and a courier may be required to speed things along.
Survey Fees
A survey of the property may come into play during the home purchase negotiations. Typically the financial responsibility for the survey can be negotiated between the buyer and seller.
Home Warranty
The home warranty is another piece that isn’t necessary. But sometimes buyers want a warranty included and sometimes the seller wants to put one in the deal to make it more attractive. No matter who asked for it, if it’s in the contract then the seller will pay for it.
Homeowners Association Fees
If there is a homeowners association, the HOA dues are typically prorated in much the same way the taxes on a property are. In some situations, there may be additional transfer fees associated with the HOA.
How to Budget for Costs of Buying a Home
In addition to understanding your annual net income, or how much you make after taxes, there’s a lot you can do to budget for buying a new house:
- Reserve part of your tax refund for the home’s down payment
- Pay down debt and high-interest credit cards now
- Trim your expenses — limit takeout and entertainment costs
- Build a realistic budget and stick to it
- Put a few hundred dollars aside each month for closing costs
What else do I need to know about buying a house?
Remember that some of the home buying fees you’ll encounter when buying a home can be negotiated. Of note: you may be able to negotiate with whomever is charging a given fee. And in other situations, the buyer and lender may work out a deal on who has to pay certain closing costs. It’s all negotiable.
Many of the closing costs fall on the home buyer but sellers should be prepared for the realtor’s fees and all other negotiated expenses.
Closing costs vary and can be further impacted by the state you’re purchasing a house in and the lender you choose. A rule of thumb that may help you anticipate these expenses is that they typically range between 2% and 10% of the home sale price.
Get the Right Homeowners Coverage for Your New Home
If you have any questions about homeowners insurance and how to fully protect your new home, connect with an American Family Insurance agent — they’re happy to help you protect your new investment. And congrats on taking big steps toward homeownership!
This article is for informational purposes only and based on information that is widely available. While we believe it to be reliable and accurate, we do not guarantee the accuracy or reliability of the information. This information does not, and is not intended to, constitute legal or financial advice. You should contact a professional for advice specific to your situation.
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