Money Matters

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!

What buying a home will actually cost you

Everyone knows that buying a home costs money. But how much exactly? While the purchase price of the home makes up the largest component, here are other costs homebuyers should be prepared to pay:

Earnest Money

This is essentially a down payment or deposit on your new home! It shows the seller that you are a serious buyer by putting some skin in the game, so to speak. Should you terminate your contract in good faith, you will get that money back. And should you make it to the closing table, the money will go towards your down payment. Earnest Money will typically be between 1%-3% of your purchase price, so make sure you have the funds readily available once you start writing offers!

Home Inspection

This is the time to have a home’s nooks, crannies, roof, sewer, and so on inspected by a qualified home inspector. Home inspection pricing can vary from company to company, but you can typically plan for $300- $1,000 depending on the types of inspections you order (sewer, radon test, general inspection, etc.).

Appraisal

If you’re like 87% of buyers that are financing their home purchase with a mortgage, your lender will need an appraisal (Property Valuation) done on the home. This ensures that they are not loaning you more money than the house is worth. Price can vary depending on the company, but you can typically plan for $500-$750 for the appraisal report.

Down Payment

The amount of a down payment typically starts around 3% of the purchase price and goes as high as you are comfortable spending or can afford. Twenty percent down is the sweet spot, where you’re no longer required to pay Private Mortgage Insurance (at less than 20% down, you’ll pay for this). You’ll want to discuss your down payment options with your lender!

Closing Costs and Prepaids

The majority of your closing costs are charged by your lender for the financing of your new home. Every lender packages their fees differently, so be sure to have them explain every charge in detail to ensure you are comfortable with them. There will be prepaid items that will be required to set up your escrow account (three months of insurance and taxes), so that the account will be solvent to pay the first bills when they arrive to the escrow servicing company.

And Of Course, Commission

Your real estate broker should disclose their commission amount and how it is paid before you submit any offers. In Colorado, it’s pretty common for the listing broker to negotiate a commission with the seller, and then advertise a co-op fee to pay the buyer’s broker’s commission. In those instances, the amount you go under contract for is the amount you pay at the closing table. Your broker’s hard work will be rewarded from the closing proceeds and reduce the amount paid to the seller.

Budgeting for closing costs is an important part of your home purchasing game plan. Unanticipated expenses right before closing is never a fun problem to deal with!

Looking for more info about buying or selling a home? Please reach out, and subscribe to our weekly emails to never miss a beat about Denver real estate.

The Cost of Waiting To Buy

By LYH broker Rhyan Diller

I’m often asked when the best time to buy is. There are always pros and cons to buying at any time of year, and while there is no exact answer, the best time is NOW.

Picture this. Leslie decides she’s ready to buy a home in the summer of 2019. She looks and looks and finds the perfect single-family home for $485,450 (the median sale price in Denver for August 2019). She puts down 5% and gets the average interest rate of 3.62%, and ends up with a monthly payment of around $2,730 per month.

Meanwhile, Ron is also thinking of buying a home in August of 2019, but he decides he wants to wait so that he can save up a bigger down payment for the ideal 20% down (which by the way, is not needed to buy!). Via his friend Leslie, Ron knows that most houses in August of 2019 are around $485,450, so he needs to save up $97,090 for his down payment. Easy! Right?

One year later, Leslie decides she wants to buy the identical house next door to her. She talks to her trusted realtor and learns that this identical house is for sale at $525,000 (the median sale price in Denver for August 2020). Confused, she asks why an identical house to hers is so much more now than when she bought one year ago.

Her realtor explains how the average home price has increased 8% since just last year! And then congratulates her, because the first house she owns already has almost $40,000 in equity — just for owning it for one year. She then learns that rates are now wildly low and refinances on her first house, taking advantage of the current 2.9% interest rates.

Meanwhile, Ron is still working on saving up $97,090, only to realize that to put 20% down, he now needs to save $105,000 (even though that’s not necessary), since the house he wanted last year is now $525,000He paid upwards of $2,000 per month in rent in Denver, essentially helping  to pay down someone else’s mortgage with no equity to be had.

We know buying a house in Denver is not easy. Most well-priced homes will sell in a matter of days, and you’ll likely be competing against multiple buyers for the “perfect” home. But if you’re waiting for the stars to align — for rates to drop even lower, for more inventory, to save for a higher down payment, or (our personal favorite) for the “bubble to burst,” you will continue missing out on earning an average of 8% year over year in appreciation for simply buying a home. No full remodel, no sweat equity, just ownership.

Denver still feeling priced out of ownership

Source: the Colorado Real Estate Journal

The age old question, revisited: should I rent or should I buy? Here, the author presents statistics that illustrate Denver’s current preference of renting over buying. In the last 10 years, home prices have exceeded rental increases by 24%, requiring far less cash to execute a lease than to transfer a deed. But one thing to note: you don’t need to wait until you have 20% saved up to purchase a home — conventional home loans start with as little as 5% down! In fact, there are other loan products that can bring the down payment even lower.

Read Article

Getting down payment help now. Sharing home’s gain (or loss) later.

Source: Tara Siegel Bernard of the New York Times

Getting down payment help now. Sharing home’s gain (or loss) later.

Throughout the US there are countless people who would love to buy a home, but continue to pay that rent check to their landlord every month instead. Why is this?

For the average aspiring homeowner, the largest obstacle to overcome is the down payment. Several companies, including San Francisco-based Unison, have found an opportunity in this challenge: shared equity.

Shared equity allows homeowners to split their down payment with an investor in exchange for a piece of the appreciation when the home sells.

How shared equity benefits homeowners:

  • Increase buying power
  • Retain some of your savings and buy a home
  • Avoid costly private mortgage insurance and high interest rates

The average loan to value (the percentage borrowed to purchase a home) for a first-time homeowner is 92.6%. Homebuyers who borrow more than 80% of a home’s value upfront are seen as risky by lenders. Traditionally, they overcome this with unfavorable interest rates and mortgage insurance. Shared equity allows for buyers to afford a large enough downpayment to avoid these costs.

The downside? By sharing equity with a firm like Unison, a home buyer saves upfront but ends up giving up a cut of their proceeds from sale if their home has increased in value.

Regardless of whether you are the type to give up some of your equity to allow an outside investor to alleviate some of the capital-intensiveness of home buying, shared equity is catching on. Unison invested alongside 450 homebuyers last year, and they project to invest with roughly 2,500-3,000 more people in 2018.

Check out the full article to dig deeper into the mechanics of shared equity.

Read Article

Home Financing Options Explained

Buying a home can be one of the most exciting (and costly) purchases you will make during your lifetime. One of the most important steps in the process is determining how much you can afford. Yet, many people wait to secure financing until it is absolutely necessary. In a competitive housing market, having your financing in place before you start your home search gives you the ability to place an offer immediately after viewing the home of your dreams, and to make that offer stronger, which is a must these days! It also allows you to focus on the more enjoyable decisions, like choosing a neighborhood.

Home Financing Options

PRE-QUALIFICATION VS. PRE-APPROVAL

Pre-qualification and pre-approval are two common words thrown around in the mortgage industry. Pre-qualification is an unofficial estimate of how much you can borrow and repay for your home purchase. The amount lending institutions will pre-qualify you for is derived from the information you provide on your finances, credit history, and income. Obtaining pre-approval requires you to submit financial documents, such as tax returns, business licensing, and bank statements. Lenders will analyze the documents, run credit checks, and verify employment. The pre-approval process verifies you have the ability to repay the amount for which you are approved and carries more weight when you submit an offer to purchase a home.  Although it takes more steps to obtain pre-approval, it verifies to the seller that you have the financing available to follow through with the purchase. It also allows you to close the loan within two to three weeks of going under contract. This gives you a competitive edge against other financed offers, everything else being equal.  (more…)