Lender Costs and Buyer Expenses While Under Contract
The Pre-Read Summary
Costs that you, as the buyer, will incur while under contract include appraisal (varies by appraiser; cannot be up-charged by the lender) and inspection (paid directly to the inspector and specialists you hire), and, when applicable, a survey (paid directly to the survey company) and condo certification (charged via the lender).
The biggest expense, and sometimes surprise, is lender costs. Upon close, lenders will charge buyers for fees such as origination, processing, and underwriting. Other money is held in escrow, such as for property insurance and taxes. Just another great reason to pick your lender before making an offer — you’ll have a pretty good idea of what these expenses might entail! Also, regardless of who is paying for the title insurance, the buyer will pay for the lender’s title policy.
A quick heads up before we jump in. Upon going under contract, earnest money will be due. This is what you, the buyer, are “putting up” to demonstrate your commitment to go through with the transaction. Is it an expense? Well, kinda. You, the buyer, will deliver the check to the title company (as a neutral party to the transaction) within a few days of going under contract. The check is then cashed and held in trust until the transaction is either terminated (by an applicable deadline) or closes. Upon close, the money is applied to your closing costs and down payment — not a penny wasted! Sellers determine what they want for the earnest money deposit. A good estimate is 1-1.5% of the home’s value, but we’ve seen 3% often enough to say, have that available.
Now, onto the fun stuff!
Lender Fees: $$$$$
What: Origination, processing, and underwriting to name the majority
Who: Lender
When: Paid at closing
How Much: Varies by lender and home, typically a few to several thousand
Know This: All lenders charge fees to underwrite and process your loan. This is part of every transaction that involves a mortgage (i.e., not paying all cash). Fees vary by lender. Some lenders offer programs that help minimize your expenses at the closing table, such as rolling some fees into the loan. Keep in mind, this helps on day one, but also means you’re paying interest on that amount over the term of the loan. Talk to your lender about their costs and any reservations you may have — they might be able to help. Although you don’t pay your mortgage for the first month, that’s only technically true. Upon close, you’ll be paying the prorated interest, which does make up most of your monthly payment, decreasing incrementally as the principal is paid down. Since this varies depending on when you close, an estimate is kinda tough, but if you save for a mortgage payment, that’s probably close enough!
Important: The time to interview lenders and select a lender is before you go under contract. Although it is your discretion to change lenders, switching can create uncertainty in the eyes of the seller… Why rock the boat when there aren’t even any waves? And, you’re busy during the contract — going to inspections, the riveting excitement of reading a title commitment and the HOA’s rules and regulations — fun times. But before all of this kicks off, you have time to compare rates and costs between various lenders and see if the one you liked best can match the cheapest!
Appraisal: $$$
Who: Appraiser via the lender
When: Paid upon appraisal, may be paid at closing
What: Determines the valuation of the home
How Much: Varies by appraiser and property, typically around $700
Know This: Appraisals are required when a mortgage is used to purchase the home, with a few exceptions, like with a significant down payment. Lenders require the appraisal to qualify the value of the home at or above the agreed upon purchase price. It also gives buyers peace of mind that you’re not overpaying, and sometimes that you’re getting instant equity! If you’re paying cash, most buyers opt to save the money (you know, for new yoga equipment for your workout room).
If an appraisal is completed, the buyer may still be charged for the appraisal by the lender, even if the contract is terminated and does not close, and regardless of whether or not the termination is a consequence of the appraisal. It’s up to the lender. If the contract terminates before an appraisal is performed, this expense is avoided. That is why most appraisal deadlines are set after the inspection.
Inspections: $$-$$$
Who: Inspection company and other specialists
When: Paid upon inspection directly to the inspection company
What: A visual examination of the home’s present condition and major systems
How Much: Inspections run about $500+ on a typical home, increasing by size. Additional inspections, such as sewer scope or radon, and other specialists will charge additional fees.
Know This: A home inspection is used by buyers to “pull back the curtain” and gain additional insight into the home. Additional services can include radon, specialists (HVAC, electrician, plumber, etc.), sewer scope, structural engineer, etc. Although a home inspection is not required to purchase a home, it is very strongly recommended even if the home is being purchased “as is.”
If an inspection is completed, the buyer must pay for it, even if the contract is terminated and does not close and regardless of whether or not the termination is a consequence of the inspection. Most inspectors will not provide a copy of their report until the invoice is paid in full.
Important: Plan ahead — some inspections, such as radon, require a few days to complete the test. And you may decide to get quotes or additional inspections by a plumber, for example, which takes time to schedule. Keep in mind, the more you do during inspections, the more expenses you’ll face. But, you’ll also know more about your prospective home!
Side Note, Surveys: For those buying a home where a land survey is needed or desired, this is paid similar to an inspection — upon completion of service to the survey company and before a report will be released. Surveys can cost a few hundred dollars to several thousand, depending on the type. Sometimes, a survey will be required by the title company to verify boundaries, encroachments, etc., in which case they’ll specify what is needed. Otherwise, you and your surveyor will determine what type of survey is most appropriate for your specific property and they will give you a quote before doing any work. If the survey is too expensive for you to continue with the transaction, it is your discretion to terminate before the survey deadline. If not, continue on!
Lender Title Policy: $$
Who: Title company
When: Paid at closing
What: Policy insuring title to the property for your lender
How Much: Varies by title company and property, usually around $600
Know This: If you’re paying cash, the lender’s policy is not applicable, as there is no lender! But, as long as there is a lender involved in the transaction, the buyer will be paying for the cost to insure title for the lender. Although the seller usually pays for the owner’s title policy (which runs $1k to $2k+), the buyer pays to insure the title for your lender.
Condo Questionnaire: $
Who: HOA via the lender
When: Paid upon request of certification, may be paid at closing
What: Condo certification
How Much: Varies by HOA, approximately $250, the exact amount is what is charged
Know This: Condo certifications are ordered early in the transaction, so talk to your lender about when and how this will be charged. As is the case with the appraisal, the buyer will likely pay for this upon charge and regardless of whether or not the transaction closes, although some lenders simply roll it into closing costs (only paid upon close). Condos must complete a questionnaire for lenders to confirm they meet standards needed for lending, which can impact the type of loan a lender can use to lend on the property. For example, if a condo is “unwarrantable” because too many units are used as rentals, the buyer may need to use a portfolio loan instead of FHA or conventional. Clear as mud? Great! Because you don’t need to worry a whole lot about it unless it applies to your transaction, in which case your realtor and lender will explain!
Other Costs…
Who: Where do we start?
When: Depends on what it is, but mostly paid at closing
What: Again, where to start?
How Much: Not much (most likely)
Know This: Other costs are going to show up on your closing settlement statement, which you will receive a few days before close. These could include prorations for property taxes, HOA dues, water bills, and the like. There will be a $25 (+/-) recording fee from the county to record your title. In most cases, this only accumulates to a couple hundred dollars more, if that. However, if there’s a large HOA transfer fee, for example, it could be more. In short, prorations are determined down to the day to make it fair and so costs are exact. Not a penny is wasted.
Still awake? Overwhelmed?
Do not fret! It seems like a lot the first time you buy a home — and maybe the second time, too! Preparation will help immensely.
First, have money readily available for your earnest money deposit, 1-3%.
Second, pick your lender and get a rough idea of costs to close the loan, what they’ve seen lately for appraisal charges (dust off your report on supply and demand), and other expenses you should expect. Know that your earnest money will be applied to this, and might even cover most of it.
Third, have money set aside to cover mid-transaction expenses like inspections, more if you’re looking at larger than average homes or unique situations.
Finally, and this wasn’t discussed above as it’s a totally different topic, but talk with your lender about how different terms and down payments can affect your interest rate, payoff amount, and monthly payment. What is the minimum required for your loan? What will eliminate mortgage insurance? When it’s all said and done, the down payment is the biggest “expense” you have when buying a new home.
And don’t be scared, because you’re not alone!
Your favorite Love Your Hood broker is going to guide you through the process. As related to these costs, they’ll help you navigate the timing of the steps throughout the transaction. A little preparation and a great realtor will help immensely!
Now that you’re prepped and ready… happy home shopping!