Buy a Home

Purchase Price

The first and easiest cost to understand is the purchase price. This is the amount of money that you are committing to pay for the home. In most cases, a large part of this will be covered by a mortgage loan; the rest will be paid through your down payment.

Earnest Money Deposit

In most cases when you make an offer you will commit to contributing some portion of the total purchase price into the transaction. This indicates your intention and ability to buy the home and is called an Earnest Money Deposit (EMD). As a rule, the EMD is generally 1-3% of the purchase price and is credited to your transaction at closing.

A portion of your down payment is typically placed into escrow at the time that your offer is accepted. The EMD can be almost any sum that the buyer and seller agree to. Although it is generally refundable if the transaction is canceled, there are cases when the EMD may be lost if the buyers are unable to complete the purchase and do not notify sellers appropriately.

Down Payment

The down payment is the payment that you contribute to the transaction. Usually just before the close of escrow the buyer (you) will receive an estimate of how much money you need to bring to the closing. This amount includes your down payment and any closing costs, minus the earnest money deposit (EMD) you paid into the transaction.

The down payment typically represents only a percentage of the full purchase price. Typically, this is money you have saved, but for some loans you can use gift funds from family members or other down payment assist programs. Mortgage financing generally covers the remaining amount owed to the seller. In some cases, the EMD is not refundable if the deal falls through and buyers do not notify the sellers appropriately.

It is still possible to buy a home with as little as 3.5% down payment. Providing a small percentage down payment can be a necessity for some homebuyers, but it does mean that you’ll have very little equity in your home when you first purchase. Buying a home with a down payment of less than 20% generally means that you may have to pay private  mortgage insurance (PMI) every month until your equity in the home exceeds 20% of market value. The investment in PMI can be partially offset by the tax benefits of the mortgage deduction but the tax benefit can vary based on individual financial circumstances and IRS rules/deductions can change over time.

Some fees associated with purchasing a home may be non-refundable if the transaction is cancelled or denied, such as the home inspection and appraisal.

Home Inspection

Generally, buyers pay for all inspections costs associated with the purchase of the home. The inspections required, and their prices, depend on the age and condition of the home as well as where the home is located. A general property inspection typically costs between $350-500 depending on the size of the home. Roof inspections generally run $100-200. Roof inspections are not included in the cost of the general home inspection. Trade-specific inspections (those by plumbers, landscapers, electricians, etc.) are generally equal to about 1 hour of the usual rate. It is important to comparison shop and/or get recommendations from trusted referrals when selecting a home inspection firm. The key to a home inspection is that the buyer is fully aware of the condition of the home so the more thorough, the better. The information provided by the inspection can also be used as part of the negotiation process with the seller.

Check your state and local guidelines, or with your  Build WyCo (CHWC, Inc) homeownership advisor or loan officer to see what other inspections are common or recommended in your area. They may include radon, oil tank, sewer scope, lead based paint, termite or other pests, and others. Some regions may require sellers to perform an additional health and safety inspection before they offer the home for sale.

Appraisal

An appraisal is an independent evaluation of the property’s value provided to the bank. Appraisals may be paid for directly at the time the service is rendered or billed at the close of escrow and included in the closing costs.

Mortgage Application Fee

Lenders may charge a fee for you to apply for a mortgage. This can range from $300-750 or more depending on your lender, and some portions may be non-refundable. There may also be similar fees for a second mortgage or down-payment assistance depending on the program.

This term generally refers to the amount of money that is necessary to bring to escrow to 'close' or complete your purchase – it includes the purchase costs and some of the transaction costs as well as some fees specific to closing.

Closing costs typically include:

• Loan costs: Lender’s fees typically range from 1-2% of your loan, but can be as high as 5%. Lender fees can include underwriting, processing, recording, and notary fees.
• Escrow costs: Escrow fees are based on the value of the property being purchased.
• Title Insurance: Title fees are also based on the value of the property being purchased.
• Insurance costs: Prior to closing the transaction your lender will require that you select a home insurance provider. Usually the first year’s policy premium will be included and paid as part of the closing costs. The size of the premium depends on the type of property and the insurance you are purchasing.

Real estate agents are typically paid a commission by the listing broker, provided the home is listed on the Multiple Listing Service with a broker. At the time of listing, the listing agent working with the seller will negotiate the total commission for the transaction. In most cases, a portion of this is allocated to pay the agent who represents the buyer. The amount of money earned by the agents involved is a percentage of the total purchase price.

For Sale by Owner properties may work differently. Even though the seller is choosing to represent themselves, they may have allocated a commission for the buyer’s agent in the transaction and these details should be negotiated and documented in the Purchase and Sales Agreement. If not, the buyer is responsible for covering the real estate agent’s commission.

In some regions, an attorney may be involved to facilitate the closing process and provide representation for the seller. In most cases it is not necessary for a buyer to provide their own attorney, but you do have the option to do so, at your own cost. If you decide to engage your own attorney, the cost of services range from $400-$1,200 or more, depending on the length and complexity of negotiations and the attorney you select. Attorneys can be engaged on an hourly basis or with a flat rate.

Once the home is yours, remember to budget for the additional costs to move your belongings and to turn on all utilities in your name, as well as the regular costs of home maintenance. Buying a home isn’t just a matter of replacing a rental payment with a mortgage payment. There are also maintenance and utility costs, property taxes, and homeowners insurance. Don’t forget about these costs when you are thinking about how much house you can afford.

If possible, ask the current homeowners about their average utility costs and property taxes, get a homeowner’s insurance quote, and budget about one percent of the home’s purchase price for annual maintenance. Then run the numbers to see if you can afford the home.