4 Home Buying Costs You'll Probably Need to Pay Before Closing on Your Mortgage
by Christy Bieber | Updated July 19, 2021 - First published on June 19, 2021
Make sure you're prepared to pay these costs up front.
When you buy a home, you need to plan for closing costs. These can add up to around 2% to 5% of the value of your loan, and they are generally paid at the time when ownership is officially transferred to you.
But there are actually some expenses that you'll incur before closing day -- and you may need several thousand dollars to cover all of these advanced costs. If you aren't expecting this, it can be difficult to come up with the money when you need it, which could affect your ability to move forward with your home purchase.
Here are four of the expenses you should be prepared for in advance of the date that your transaction closes.
1. An earnest money deposit
When you make an offer on a house, you usually need to put a deposit down to show you are serious.
You can suggest the amount of your deposit when you make an offer to a seller, but they may not accept it if it is too low. That's because sellers take a risk by accepting your offer and listing their home as "pending," rather than keeping it actively on the market. Many sellers like to see a deposit of at least 1% of the home's value, or sometimes even more in a competitive market.
Typically, once your offer is accepted, you'll have just a few days to make the deposit. The money is held by a third party -- often the title company or attorney scheduled to handle the real estate closing. And it's ultimately paid to the seller at the time the sale closes, or you get it back if the transaction is cancelled for a valid reason.
Although the deposit reduces the amount of money you'll need to come up with on the day you close on your home, it can come as a big shock to have to put down several thousand dollars in "earnest money" well before the day that ownership of your new house actually transfers to you.
2. Appraisal fees
Most mortgage lenders mandate that a professional appraiser assesses the fair market value of a property before they will approve you for a mortgage. The purpose of a home appraisal is to ensure that the home is worth enough to guarantee the loan.
Appraisers need to be paid even if the house doesn't appraise for enough money or if there is some other problem that derails the loan from going through. As a result, you're generally required to pay for the appraisal up front rather than at closing. This could mean you need several hundred dollars early in the loan approval process.
3. Inspection fees
You'll likely make your offer to purchase a property contingent on a home inspection since you want to ensure there are no hidden surprises that need to be addressed before you buy. It's up to you to pay for any inspections that you want the house to undergo.
And you can expect to pay several hundred dollars to a professional inspector. In fact, if you want multiple inspections, such as an inspection of the home, the septic system, the swimming pool, the well, and other components, then you may need to pay multiple inspection fees.
4. Survey fees
Identifying the property boundaries is also important to make sure you know what you're buying and to identify any possible encroachments on your property (or issues where structures that are part of the home are on someone else's land).
Surveyors also need to be paid within a few days of the survey being conducted, and that usually happens well before closing. Again, this can be a couple hundred dollars or more if your property is large and complex to survey.
Being prepared for these fees is a key part of buying a home, so make sure you have money ready in your bank account to cover them. Having cash saved before you start shopping for a new home will help prevent you from being caught unprepared for the expenses that arise while purchasing your home.
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