What costs do home buyers pay outside of closing?

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Even with 100% financed loans like VA loans, buyers will have costs to pay out-of-pocket before they get to closing. It’s important to be prepared for those costs.

Earnest Money Deposit – 1% of purchase price

Since the earnest money deposit (EMD) is applied to your balance at closing, this one is not a true cost, but it will be payable either with your offer or within 1-3 days of contract acceptance. The buyer’s deposit binds the contract and is kept in the care of a title company.

A rule of thumb for deposits on most financed home purchases is approximately 1% of the purchase price. If you’re purchasing a home for $300,000, a $3,000 deposit is customary. If the purchase price is $125,000, you might be okay with just a $1000 deposit. The 1% is not a rule; just a guideline. Deposits are negotiable, but keep in mind that sellers do not want to lose precious time on the market if buyers do not demonstrate a commitment to closing, so your deposit should be sufficient for your offer to be accepted.

Unlike the costs below, the deposit is usually protected by contingencies like during the inspection period. On a typical as-is contract, the buyer can cancel the contract and be refunded her deposit for any reason. Another common contingency is the financing contingency. Within times allotted in the contract, the buyer’s deposit is refundable if he is unable to secure financing.

If the deal closes, then the deposit shows up as a debit in the buyer’s column of money already paid.

Home Inspection

It is always recommended for buyers to get a home inspection by a licensed inspector.  Sellers are obligated to furnish a seller’s disclosure with the details they know about the home, but an inspector will look over the entire home carefully to furnish a detailed report on condition.

4-Point Inspection and Wind Mitigation Reports: up to $100 ea. or included in home inspection cost

These two reports are required by homeowner’s insurance companies when determining your rate and eligibility for certain discounts. Wind mitigation reports are used for all homes that qualify for a discount and the 4 Point inspection is required for older homes (30 yrs+). Home Inspectors complete these reports, so it’s best to ask about them and the cost when scheduling the home inspection. They may charge separately or bundle the report cost with their other services.

Termite Inspection: $75-$150

Termite inspections are required both for your peace of mind, as well as your lender if you’re getting a mortgage. VA loans require that the termite inspection not be paid by the borrower, but if, like many VA loans, the sellers are paying toward closing costs, the termite inspection fee may be paid from those concessions. They typically cost between $75-$150.

Other Less Common Inspections

The two inspections above are the most common; however, there may be more depending on the home and/or the results of the home inspection.

Septic Inspection

A septic tank on the property should be inspected by a Septic tank company who will empty it and then inspect. Septic tanks require emptying every 3-6 years depending on the size and the number of people in the home. They cannot be inspected without being emptied, so that step is necessary in order to complete the inspection and also confirms that the maintenance has been completed. The process and inspection cost between $200-$300.

Many septic tanks are not adequately maintained which would leave them overfilled (gross!) and possibly damaged. Replacing tanks is very costly, so skipping the septic inspection would be ill-advised.

Well for Water Supply to the Home

If the home is not connected to public water and uses a well as its main water supply, this should also be inspected, or at the very least, the water should be tested for quality and impurities. Costs for this vary. Water analyses begin at about $75. VA and FHA loans will require, at minimum, a water quality analysis.

Seawall and Dock Inspections

If the home has a seawall or dock, buyers may choose to have them inspected. These inspections start at about $85.

Issues of Concern

If the home inspector expresses concern about a particular issue, he may recommend further evaluation by an appropriate contractor. Some examples of this may include soil testing or an engineering report if there is evidence of a sinkhole, a pool contractor inspection if there is a serious concern with the pool condition or a mold inspector if that appears to be a possible concern.

In addition, if the buyers have additional concerns not covered by the basic home inspection, they can get additional inspections completed at their expense during the inspection period. If there are enough areas of additional concern and the buyers have some leverage, some inspections may potentially be negotiated to be covered by the sellers.

Appraisal

The costs above all happen shortly after getting into a purchase contract. As you approach closing, your lender will contact you to pay for the appraisal. Appraisals cost between $400-$550. This cost has already been included in your closing cost estimate from your lender, but it is paid outside of closing when it is ordered. Like your earnest money deposit, this will also show as a credit as closing.

Deposits for Utilities

If you are new to the area, you may be required to give utility deposits in order to set up service. If so, deposits are usually the approximate cost of one month of service. The utility company will typically hold your deposit for between 6-12 months and then return it or credit your account after you’ve maintained a good payment history with them.

If you’ve already held utilities in the area or if you pass certain credit guidelines, you may be able to turn on service without leaving a deposit.

Check at Closing for Some

In cases of 100% financing like with VA loans, the buyer may choose to have the two closing cost items (your deposit and your appraisal fee) refunded at closing in the form of a check. Otherwise, they may choose to apply that money toward the balance and therefore, have a slightly lower loan amount. The inspection costs and utility deposits do not fall into that category, so they are not refundable.

Be Prepared

As with all parts of the home buying process, preparation is key. You’ll need to be prepared for these out-of-pocket costs before you begin searching for a home and go under contract. Once you’re in the process of closing a loan for a home, you cannot further charge up your credit cards, so you’ll need to be prepared to pay for these costs from your savings and still keep enough for down payments, closing costs and any reserves that you’re expected to furnish or demonstrate at closing.