Amidst all the excitement of searching for your new home, buyers should be aware of the costs
attached to the home buying process. These costs can be significant for some buyers so you want to take them into account when starting your home search.
- Down payment – The days of no down payment are largely gone. Lenders expect you to have some “skin in the game” when purchasing a home. Expect to need 3.5% for FHA loan. So, for a home that costs $150,000, this would be $5,250. Conventional loans will require down payments ranging from 3-20%. Note also that there may be down payment assistance programs available. Your lender should be able to advise you on the availability of programs. Although the loan product will define the minimal down payment needed, keep in mind that a higher down payment will lower your monthly mortgage payment.
- Earnest Money – Once your contract is accepted, you will be required to make a “good faith” deposit of generally 1-2% of the purchase amount (sometimes less depending upon the norms of your local current real estate market). This deposit is usually held by the seller’s broker in an escrow account. At the closing, this deposit will go towards the down payment needed to purchase of the home. There are generally contingency protections to ensure that this deposit is not lost by the buyer in case purchase does not go through. These contingencies generally include an inspection period, attorney review and mortgage contingency. The contingencies should be written in to the purchase contract so make sure how they are handled in the contract used for your offer.
- Closing costs – Closing costs for buyers include such expenses as attorney and appraisal fees, loan fees, title costs, property tax and insurance escrow. Expect this to be 3-6% of the purchase price. Often negotiations with the seller include asking that the seller either partially or completely pay for these costs but that is not a guaranteed outcome. The seller does have the right to refuse the request for contribution toward the buyer’s closing costs since this will reduce their net proceeds from the sale.
- Home Inspection – The buyer should want to get a home inspection for the property they are considering purchasing. The inspector will make sure that the mechanics of the home (roof, foundation, furnace, plumbing, etc.) are in good condition. The inspector will also take the buyer through the house to address any other functional concerns they should be aware. Inspections generally range from $300 – 500.
- Attorney Fees – In Illinois, the buyer will generally have attorney representation for their purchase. An attorney in Illinois is not mandatory but it is highly recommended. This is a legal transaction involving a lot of dollars. Attorneys are involved in review of the contract and/or addendums, negotiation issues, resolution of any title issues, preparation of the closing HUD and explaining the bulk of legal documents needed to be signed. Generally, expect this to be $400-500. Attorney costs are often included on the HUD and paid as part of the closing costs.
All of the costs above are paid out of pocket as part of the home buying process. They are separate from the amount financed with the mortgage. Knowing what these costs are upfront may reduce some of the unknown in the overall process.
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