Upfront Costs of Purchasing a Home in Gig Harbor
The upfront costs associated with purchasing a home is a great topic for buyers to understand BEFORE they get into the house-hunting game. A home is a big purchase and there are various costs to take into account, not just at the outset but also within the first 30 days. Read on for the ins and outs of what to expect so you can purchase your next home with confidence.
DOWN PAYMENT & CLOSING COSTS
The first step is to figure out what loan program you are going to work with. To do this, seek out a local lender in your market that can guide you through your different options. Are you going to put 0% down with a VA loan, 3.5% down with an FHA, or 10%-20% down in a conventional loan? (There are more options than just these, but you get the drift.) When we talk about down payments according to the contracts, those funds must be liquid and available to you, such as in a savings account. If those funds are NOT liquid or readily available then you need to disclose where the funds are coming from; for example, a retirement account, stock account, proceeds from the sale of a home, or gift funds. These are considered contingent funds and are allowable, but they must be disclosed to stay in battery with the financing addendum of the contract and be able to protect your earnest money, which we talk about below.
Once you have a plan for your down payment (the largest chunk of funds), we move on to closing costs. The buyer’s closing costs are typically between 2-3% of your purchase price, and if you are working with a great lender, they can run those numbers for you and give you a specific figure based on the home you are purchasing. Closing costs include loan origination fees, title and escrow fees, recording fees, and other smaller prorated items such as HOA dues. Keep an eye out also for the seller’s prepaid property taxes, as those can sneak up on you at closing.
In a buyer's market, or with a home that has been on the market for a long time, it could be an option to negotiate for the SELLER to pay the buyer’s closing costs, allowing the buyer to keep more funds in their pocket. The other option is to wrap closing costs into the loan BUT this could affect the appraisal value, so you would need a skilled local agent in order to navigate this strategy.
In conclusion, these two types of costs will be funds that you need 24-48 hours before closing day, which is typically 30 days after your offer is accepted. The funds can come from different sources but you should be in communication with your lender every step of the way so that the proper documentation is provided for final loan approval. That’s why working with a local lender is helpful, since they are easier to reach and are more invested in communicating with you, as it helps their reputation in the local marketplace and with other agents.
THE INCIDENTALS
Earnest Money Deposit or Good Faith Deposit: These funds typically need to be submitted within three days of mutual acceptance of your offer, so you need to have them in hand and ready to spend. The standard amount is 1% of purchase price, but in a hot market like 2022 we sometimes see up to 5%. This tells the seller you are committed to the purchase, but if you find a “deal breaker” in the contract you typically get that earnest money back.
In a neutral market (where buyers and sellers are on the same level) you would promise the deposit as long as the contingencies are satisfied, but if for some reason the house inspection failed, you would get your earnest money back. As buyer’s agents we try to protect your earnest money every step of the way by writing in contingencies, thus giving you time to research your new home.
In an extreme seller’s market like 2021, we saw aggressive buyers convert their earnest money deposit to a non-refundable deposit at time of mutual acceptance, essentially guaranteeing they would buy the home regardless of contingencies or they were willing to lose those funds. This is a strong card to play in a situation with multiple offers.
Another important thing to note is your earnest money goes TOWARDS your down payment and closing costs; they are not on top of those costs.
Home Inspection Costs: Buyers who choose to hire a home inspector (highly recommended!) pay for the home inspection. It’s your chance to “look under the hood” of your new home to identify material defects or health and safety issues. Costly repairs can be discovered in home inspections and save heartache for buyers after moving in. Inspections can be paid by credit card, cash, or check, and typically range from $350-$700 depending on the size of home and whether written reports are required. You can also choose to do additional inspections such as a roof inspection, crawl space inspection, sewer scope, or geotech survey, all based on the time allotted in your contract and the type of home you are purchasing. I would say the most common inspections are sewer and drain field scopes (typically between $300-$600) and a general home inspection. Every now and then, most often in a seller’s market, a very prepared seller will provide a seller-procured inspection for the buyer. Buyers are still encouraged to do an inspection on their own, but this can provide some peace of mind in markets like we saw in 2021 and expect in 2022 if you choose to waive your inspection (not recommended though). If you are in a position where other buyers are waiving inspections, I would advise requesting a pre-inspection of the home before your offer is accepted. There is the risk that you won’t win the home in a multiple-offer situation, but at least you would have the chance to know what you were purchasing. In my business we keep an inspector on retainer so that our buyers always have the opportunity to get an inspection. If you want to save funds you could do a verbal, no-report inspection AND just look at the major high-ticket areas like roof, attic, crawl space, plumbing, electrical furnace, and water heater…oh, and ideally scope the sewer.
SPECIAL CIRCUMSTANCES IN A SELLER’S MARKET
Additional Down Payment Due to Low Appraisal: This is a scenario that can be used to strengthen your offer when prices are escalating and there is worry that the home will not appraise very high. Commonly used in situations with multiple offers, buyers will write in a guarantee to bring in additional funds if the appraisal comes in lower than the purchase price. For example, if you are purchasing a home at $430,000 but the appraisal comes in at $410,000, the bank will only lend on the appraised value of $410,000, leaving a gap of $20,000. In a normal market the buyer and seller can renegotiate the price, but in a multiple-offer situation we often see this: if a buyer offered $20,000 as an additional down payment the price would be back to $430,000, and the buyer would add the $20,000 to the down payment and closing cost amount due at closing. (It’s your choice what you want to offer as the additional down payment; it can be $1,000 or $500,000.) In a seller's market this is a very strong addition to an offer, as typically the highest additional down payment wins when there are multiple offers on a house.
RARE, BUT GOOD TO KNOW
Buyer’s Agent Fees: If someone has told you that you as the buyer don’t pay for your buyer’s agent, that is not entirely true. The cost of the buyer’s agent fees are typically paid for by the seller since they are wrapped into the cost of the home, and there is a Selling Office Commission listed on popular real estate websites. A true professional buyer’s agent will have you sign a buyer’s agency agreement, which is a professional document between you and the agent saying that you will pay your buyer’s agent a certain percentage or a flat fee for their guidance and support through the home buying process. If you have a buyer’s agency agreement, you are promising them that you will pay them the agreed upon amount. Most often this is paid for by the seller; however, if you have an agreement and the Selling Office Commission is less than your agreement you would be responsible for the difference out of pocket. Most buyer’s agency agreements can be terminated by one side with written documentation and you are free to renegotiate, hire another agent, or go on your own.
SHOP LOCAL
Now you know exactly what constitutes the out-of-pocket expenses when you purchase a home, and a recurring theme you should have noticed is to shop local for your real estate agent. Local agents will know their area of expertise inside and out, understand market statistics like the back of their hand, be familiar with factors that can help you understand market appreciation when you are making pricing decisions, and have connections with local inspectors so you can get someone quickly. All in all, this can help make sure you don’t overpay. So shop local for your agent and lender, as they have established relationships that can influence the other party and provide you the information you need to write a winning offer.