When buying a house most buyers will use a lender to get the money to pay for the house. Even though the lender can finance up to 100 percent of an owner occupied purchase, there are still costs a buyer has to pay. Real estate agent commissions and most of the expenses of selling a house are paid by the seller of a home. Buyers will have costs associated with getting a loan, closing costs, recording costs and inspection costs. When you get a loan on a home there will be origination fees for the loan as well as insurance and interest costs, which can surprise buyers.
What costs does a seller of a house usually pay?
Before I get into all of the buyer costs when purchasing a home, I want to talk about the seller costs. The majority of the costs of a house transaction fall on the seller, because the seller usually has more money to spend. The seller can use the equity in their house to pay a real estate agent, title insurance and other costs. Most buyers don’t have a lot of cash to spend on those costs and having the seller pay them actually allows buyers to have more purchasing power, which raises housing prices. Even though the seller pays more of the costs, the system benefits the seller because there are more buyers and higher prices.
While the buyer will have costs when buying a house, the seller typically has many more costs. The seller pays a real estate agent and the title insurance, which can run six to eight percent of the cost (all commissions are negotiable). In some cases the seller may pay part of the buyers closing costs as well, which could be another three percent of the selling price.
What costs does a buyer have before they close on a house?
There are loans that allow up to 100 percent financing, which we will talk about soon. Even with a 100 percent financed loan the buyers will have costs. Before the closing a buyer will have costs associated with the purchase of a home like:
- Earnest money: Almost every seller will require earnest money to be paid when they accept an offer. That earnest money is usually refundable based on an inspection contingency, loan contingency and other factors. The buyer will have to pay the earnest money to the seller, which is usually about one percent of the purchase price. When the house closes, the earnest money will go towards the closing costs the buyer pays.
- Inspection costs: Most buyers should always get an inspection done on a house. Inspections run from a few hundred dollars to over $1,000 depending on the size of a house. On top of the money it costs to hire the inspector on some listings like HUD, the buyer will have to pay to have utilities turned on and the home re-winterized after inspection.
- Appraisal Costs: Most lenders will require an appraisal to be done on the home to make sure the home is worth what the house is selling for. The appraisal can be $400 to $600 and is paid by the buyer. In some cases the seller may pay for the appraisal for the seller by paying the buyers closing costs. However, the buyer may have to pay for the appraisal before closing and if the house does not close get stuck paying that cost.
- Repair Costs: A home needs repairs in order to qualify for a loan and sometimes the buyer has to pay for those repairs. On HUD homes it is not legal for the buyer to make repairs before closing, but on other deals the seller may allow them to fix items like the plumbing or electrical so that the lender will loan on the house. In many other cases the seller may pay for these items to be repaired before closing. Always get permission from the seller to fix anything on a house before you own it!
- Extensions: On many REO and Hud listings there is a specific amount of time you are given to close on a property. If you do not close on time, the seller will charge you a fee to extend the closing. The fee could be a daily number like $50 per day or a lump sum like $375 for 15 days. All of these fees will be laid out in the contract you sign to buy the home.
- Total Costs Before Closing: $1,000 to $5,000 (if repairs are needed)
The fees before you buy a house can run from a couple hundred dollars to over $1,000 depending on the type of listing and the house you are buying.
What costs are involved with getting a loan on a house?
There are many different loan options for buyers and they can vary greatly depending on if you will be an owner occupant or an investor. Most owner occupant loans require the buyer to live in the home at least one year. Some loans like VA will finance 100 percent of the purchase price of the home for owner occupants. If you do not qualify for VA, there are loans that will allow as little as three percent down. Here is a great article on loans that allow little money down.
Almost all banks will require investors put 20 percent or more. There are some options to buy properties with less than 20 percent down which I explain here. Whether you are an investor or an owner occupant you will have costs associated with the loan.
- Appraisal: The appraisal is charged to the buyer before closing in some cases and in other cases they are charged at the closing.
- Origination fee: The origination fee is charged by the bank and their fee to complete the loan. The origination fee can be half a percent on some loans to one and a half percent on others. Some hard money loans will have fees that are as high as six percent!
- Lender’s title insurance: The lender will require title insurance to ensure they are in first position. Some times the seller will pay for this costs.
- Processing fees: Some lenders will charge a processing fee on top of the origination which can be a few hundred dollars.
- Flood certification: The lenders will require the home is not in a flood zone and if it is, there is additional insurance in place. There also may be credit report fees and other miscellaneous small charges that are usually less than $100.
- Interest: This fee can surprise many buyers because they don’t expect to pay for interest on a loan they don’t have yet. On many loans the buyer does not make a mortgage payment until the second month a payment would be due. For example, closing is May 15 and the first payment would be due July 1st, not June 1st. The lender makes this seem like a great benefit, but the buyer is still paying interest for that first month by paying it at closing.
- Prepaid insurance and taxes: Another surprise for many buyers is they have to pay their insurance on a house upfront when they get a loan. The lender will usually escrow the insurance and property taxes on a home, meaning the lender pays those costs as long as there is a loan on the home. The lender does this to protect the home and make sure the loan can be repaid if the house burns down. Or if the owners stop paying taxes someone can buy tax liens and take over first position from the lender, which the lender does not want. At least the first year of taxes and insurance are collected at closing to start the escrow fund.
- Mortgage insurance: On FHA loans there will be mortgage insurance when there is less than 20 percent down. The mortgage insurance is required on most loans with less than 20 percent down (except VA) and protects the lender from the buyer defaulting. With FHA some of the mortgage insurance is paid at closing as well as every month.
- Down payment: Not all loans have zero down payments like VA. The buyer will have to pay the down payment on top of the other loan costs discussed.
- Costs at closing with a loan: $2,500 to $10,000 based on a $100,000 purchase price.
As you can see the loan costs can add up very quickly when buying a house. Just because a loan is advertised as three percent down, does not mean the buyer will only be bringing three percent of the purchase price to closing.
What are the closing costs when buying a house with cash?
There may seem like a lot of costs a buyer has to pay when getting a loan, but they are not done yet. There are costs any buyer will have to pay at closing, whether they get a loan or pay cash. For a buyer getting a loan, these costs would be on top of the costs we already discussed above.
- Closing fee: The title company completing the closing will charge a closing fee. In Colorado typical fees are from $200 to $500, but some states use attorneys to complete closings and the costs can be much higher. It is common for this fee to be split between buyer and seller.
- Recording fees: When a closing is completed the deed and other documents have to be recorded. When a buyer gets a loan they have many more documents that have to be recorded and the fees will be much higher. Recording fees can be a couple hundred dollars.
- HOA fees: If a home has an HOA the seller may agree to pay transfer fees or it may be agreed to split the transfer fees. These can be minimal to hundreds of dollars.
- Taxes and transfer fees: In Colorado we do not have tax fees for most real estate transactions. That is not true in every state and these can be paid by either party as well.
- Title insurance: Most sellers will pay for title insurance, but some sellers do not. HUD does not pay for title insurance and neither does VA when they sell their foreclosures.
- Costs without a loan: $300 to $1,000
The total cost to buy a house can range from less than $1,000 if paying cash to well over $10,000 including the down payment if you are getting a loan. These costs are based on a purchase price of $100,000 with a low money down loan. The costs would go up significantly on more expensive houses and you can usually count on at least three percent of the purchase price being closing costs if you are getting a loan.
How can you bring less cash to closing when buying a house?
As you can see the costs to buy a house can run into the thousands of dollars very easily. Many buyers do not have the cash needed to pay these costs on top of the down payment. In some cases the seller is allowed to pay closing costs for the buyer to bring down the amount of cash needed. HUD will pay up to three percent of the buyers closing costs and some sellers will pay even more.
You have to remember when you ask the seller to pay your closing costs you are asking them to take less money. If you offer $100,000 with the seller paying $3,000 in closing costs, to the seller that is a $97,000 offer. In a competitive market when prices are increasing buyers sometimes have to offer more than list price, especially if they are asking the seller to pay closing costs.
Most lenders will not let the seller pay any part of the down payment amount or anything besides closing costs and prepaid items. If you want to buy a home for $100,000 and finance $120,000 to pay for repairs you are going to be limited to very specific loans like a FHA 203K or hard money loan.
As you can see there are a lot of costs when buyer a houses, especially with a loan. If you are interested in buying a house talk to a lender right away as they will give you an estimate of these costs and let you know if any of them can be financed into the loan. There is no guarantee the seller will pay title insurance or the agent fees either, but they do in most cases.
These are also only the buying costs, if a home needs repairs, do not forget to estimate those costs after closing. Even though the costs can be high to buy a house, if you get a great deal on a home it can be an awesome investment.