If you’ve purchased a home before, you know that there are a number of fees on a big ol’ sheet from your loan officer. You’ve seen the form if you’ve purchased a home before–it’s called a HUD-1. If you haven’t purchased a home before, you may think that the $100K home you just signed away for is only going to be $100K and not a penny more.
Hopefully your lender told you a lil’ somethin’ about closing costs. Better yet, you might have passed the privilege over to the seller for he/she to pay, making the transaction a bit cleaner. If you didn’t know about closing costs, you may be in for a little sticker shock. You’ll want to ensure your cashier’s check for the down payment includes these extra fees. Most of these fees are hidden, not intentionally, but they can be difficult to find. They are all wrapped within the umbrella of “closing costs”, and although your loan officer tries to review these with you, it’s easy for most home buyers to glaze over them.
Take a hard look at the HUD-1 form you receive which is a standard form in the U.S. used to itemize the purchase fees you are responsible for. You’re likely to see the following somewhere in the list:
Earnest Money – You’ll need to pay this when you make an offer on the house. Earnest money is how the seller knows you are serious and “mean business.” Sometimes it can be 1% of the home’s purchase price, perhaps even 2% in certain areas. The amount you pay can vary greatly depending on the housing demand in your area. You may not enjoy parting with the money, but have no fear…the earnest money goes towards the down payment of your house once you lock in. Just don’t go willy-nilly with offers since you need to find a legitimate problem with the property or have a complication with your mortgage to justify the return of your money. Your purchase/sale contract should have a contingency in there that allows you to forego the initial purchase fees (like earnest money) if financing cannot be obtained. Even with perfect credit, issues can come up with financing and you want your contract to protect you.
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Warning: Don’t go grabbing earnest money from your secret stash under your mattress or the rainy day jar of cash in your underwear drawer. Your lender may need to verify large deposits and you’ll need to have some proof that you’ve had this money available for 60 days.
Mortgage Application Fee – Even though you’ll be helping the bank out with interest every month, there still might be a fee for your application. The amount of this fee, or lack thereof, depends on your lender.
Credit Reporting Fee – Those credit checks the bank runs for you are unfortunately not free. Make sure you keep a copy for your records after the credit report is run. Since you are paying for them, you might as well take a look.
Appraisal – The bank requires this for their own benefit, but YOU are still the one paying for it. Make sure to get a copy of the results and use those to help get an idea of how much your property is worth. There’s nothing better than purchasing a property for $80K and finding out the appraiser valued it at $100K! No appraisal is “perfect”…the house is really only worth the value someone will pay for it, but paired with Comparative Market Analyses (CMAs) you should’ve done before making an offer, it is a great way to determine the value of your home.
Title Company Fees – You will be potentially hit with a number of small fees here. Title insurance, recording fees, escrow fees, and documentation fees are some of the offenders. Sometimes the seller may pay these, especially if they are paying your closing costs. If you pay cash, many of these fees are not applicable. When you pay cash, you cut out the assistance from the bank. This means you should have a good real estate attorney involved with the transaction to determine what fees you’re responsible for.
In real estate investing, you’ll want to “opt-in” to some of these fees. “Why would I ever do that?” you ask. Well, when you become a real estate investor you start to find value in the extra services your home inspector and appraiser can give you.
Home Inspector – Prevent costly repairs by catching issues early on. You can select a basic home inspection and a Wood Destroying Organisms (WDO) inspection, i.e. termites and similar critters. You can read more about inspections and the due diligence process HERE.
Appliances/Improvements – Don’t forget that your house may not be “rent ready.” A whole house and WDO inspection might have come up negative, but you may need to supply a refrigerator or even a washer/dryer. Good news–although you probably can’t get away with charging rent on a refrigerator, you can certainly factor a washer/dryer into your rent price. This could vary by market, but $25/month per utility is a basic guideline and not objectionable. Sometimes, a tenant will already have a washer/dryer or will purchase them in lieu of renting them if they are thinking long term. Either way, if you play it right, the appliances can be covered by the tenant from varying angles.
Although we’ve covered a lot here, some banks or cities/states may have their own purchase fees they like to toss into the mix. Use this list as general information, but please check with your lender and ensure that you understand the HUD-1 form and the full closing costs. Check with your Realtor® or attorney to understand the earnest money spelled out in your contract and if you can get it back.