Buying a house is a goal for just about everyone. Even though lenders can finance up to 100 percent of an owner-occupied purchase, the buyer must still pay certain costs. The good news is that real estate agent commissions, title insurance, and other costs are usually paid by the seller.
Buyers will have costs associated with getting a loan, closing fees, recording costs, and inspection costs.
When buyers learn how much money they must bring to the closing once all costs are calculated, it can be a surprise, so in this article, I’ll cover what you should expect when buying a home.
Complete costs of buying a house
Even if a bank finances 100 percent of the house price, the buyer will pay something. Before the closing, a buyer may pay the following:
1. Down Payment
The first major expense you’ll encounter is the down payment. The down payment is some amount of money that you pay your lender to reduce the amount of your loan (thus reducing your monthly payment) and to demonstrate to the lender that you have a serious financial stake in the transaction. Some mortgage loans may not require a down payment, but most do — perhaps 5 or 10 percent or more of the price of the home. In the case of a $250,000 home, this amount could come to about $12,500 to $25,000 — or more.
The larger your down payment, the smaller your loan. If you make a 20-percent down payment on a $250,000 home ($50,000), you need only a $200,000 loan. If you make a 10-percent down payment on the same property ($25,000), you need a $225,000 loan.
The ratio of the total amount of the mortgage you apply for to the appraised value of your home (determined in advance by an independent appraiser or by a look at recent sales records) is known as the loan-to-value ratio, commonly abbreviated as LTV.
In the 10-percent down payment example above, the LTV is 90 percent ($225,000 divided by $250,000), assuming that the appraised value of the home is the same as the sale price of $250,000. In the 20-percent down payment example, the LTV is 80 percent.
The Federal National Mortgage Association backs only loans that have an LTV of 80 percent or less. If the LTV exceeds 80 percent, the loan requires private mortgage insurance (PMI), which protects the lender in case you default on your home loan.
2. Closing costs
The down payment and PMI are hardly the end of it. You will encounter plenty of other expenses (commonly called closing costs because they are charged during the loan-closing process) as you work your way through the actual home-buying process. Consider these common closing costs:
Points: These are fees (1 point is 1 percent of the loan amount) paid either to generate cash at loan closing to pay loan officers and origination departments, or to reduce the interest rate by compensating upfront for the interest the banks pay to their investors. Points are also sometimes called loan origination fees.
Credit report: Your lender will want to check on your creditworthiness, to see if you are a good credit risk. Credit reports are widely available for less than $30.
Appraisal fee: Your lender will likely require that the property you want to buy be appraised, in which a licensed and trained professional (coincidentally, known as an appraiser) assesses its true market value. This fee may vary from $250 to $1,000 or so, depending on the value of the house.
Title insurance: This insurance policy protects you in case someone comes forward with a claim against your property after you have already bought it. Normally, it also pays for a thorough review of your property-to-be, to ensure that there are no hidden legal claims to it that might be an unwelcome future surprise.
Survey fee: Your lender may require that a surveyor determine the precise boundaries of your property. Figure on $200 to $400 to cover this expense.
Recording and transfer fees: Your local government probably charges a nominal fee to record your real estate transaction and transfer the deed into your name. Fees average about $50 to $150 for most jurisdictions.
Application fee: Some lenders require payment of a fee to defray their costs for processing your loan application. Loan brokers are not allowed to charge an application fee, and banks rarely charge it except to cover the cost of an appraisal or credit report.
Flood determination: This fee (usually no more than $30) is paid to determine whether your property is in a flood zone. If it is in a flood zone, you might want to think twice about wading into the transaction (or at least be sure to get flood insurance!).
Flood certification: If your house is determined to be clear of a flood zone, this piece of paper certifies it.
Courier fee: Someone has to get paid to run all your loan paperwork all over town at the last minute. Guess who that is? The courier.
Closing fee: Your loan closes at the exact moment your real estate transaction is executed. The entity handling this transaction maybe a title or escrow company, or an attorney. Fees generally average about $1.50 per $1,000 in loan value — probably more if you use a highly specialized real estate attorney to handle the closing.
Your lender is required to disclose the costs you will pay for your mortgage to you by way of a Good Faith Estimate and Truth in Lending Statement, which details the interest rate paid for the life of the loan (APR). By law, this statement must be provided to the borrower within three days of a loan application submission.
Furthermore, whoever is handling the closing of your purchase must provide you with a copy of the HUD-1 Settlement Statement, a federal government-mandated form that details all the different costs that are charged as part of the transaction. Be sure to request these forms before your real estate closing. If you don’t understand something — or if a cost seems out of line or inappropriate — have your lender, real estate agent, or closing party explains it to you in detail.
3. Prepaid insurance and taxes
Another surprise for many buyers is they must pay their insurance on a house upfront. The lender will usually escrow the insurance and property taxes, meaning the costs are added to the mortgage payment.
The lender does this to protect the house to make sure the loan can be repaid if the house burns down. If the owner does not pay property taxes, the state could auction off the property, which the bank does not want!
4. Mortgage insurance
There will be mortgage insurance on FHA loans and many other low-down-payment loans. Mortgage insurance is required on most loans where less than 20 percent is put down (except VA) and protects the lender if the buyer defaults. With FHA loans, some of the mortgage insurance is paid at closing in addition to every month.
5. Inspection costs
Most buyers should always have an inspection done. Inspections cost anywhere from a few hundred dollars to over $1,000 depending on the size of the home. In addition to the cost of hiring the inspector, some listings, such as HUD, require the buyer to pay to have the utilities turned back on and the house winterized after the inspection.
6. Repair costs and utilities
A house may need to be repaired in order for a lender to lend to it, and the buyer sometimes has to pay for those repairs. At HUD, it is illegal for the buyer to make repairs prior to closing. However, in other cases, the seller may allow the buyer to repair things like the plumbing or electrical so the lender can lend on the home. In many other cases, the seller may pay for the repairs before closing. Always get the seller’s permission if you want to repair anything on a home before you buy it!
There will also be utilities to pay for, including water, sewer, gas, and electricity. The costs of these utilities vary depending on location, but generally speaking, the larger the property, the more they will cost.
7. HOA fees
If a home has an HOA (Home Owners Association) the seller may agree to pay transfer fees or it may be agreed to split the transfer fees. These can be minimal or hundreds of dollars.
Occasionally, HOAs can charge special assessment fees for urgent repairs. Many buyers overlook these financial obligations when adding up the costs of buying a home, but they add up quickly.
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. These fees will be laid out in the purchase contract you sign.
What costs does the seller usually pay?
The majority of the costs fall on the seller because they usually have 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 house prices. Even though the seller pays more of the costs, the system benefits the seller because there are more buyers and higher prices.
The seller’s real estate agent and title insurance can run six to eight percent of the selling price (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.
Home prices forecasts
According to Fannie Mae, U.S. home prices will rise 10.8% in 2022. The forecast is slightly lower than what Fannie Mae predicted in March when house prices were expected to rise 11.2%.
It would represent a deceleration from the record 18.8% jump that occurred last year if home prices rose 10.8% in 2022. However, it would hardly be a relief for home buyers. It would still be more than double the average annual home appreciation (4.6%) since 1987 at that rate.
Despite the fact that Fannie Mae expects home price growth to remain in the double-digits through 2018, the company does not expect it to last past 2022. Fannie Mae predicts that home prices in the U.S. will rise just 3.2% next year. Compared to March, when Fannie Mae projected a 4.2% increase in 2023, this is a little lower.
“Mortgage rates have ratcheted up dramatically over the past few months, and historically such large movements have ended with a housing slowdown. Consequently, we expect home sales, house prices, and mortgage volumes to cool over the next two years. In particular, we expect house price growth to decelerate to a pace more consistent with income growth and interest rates,” writes Doug Duncan, chief economist at Fannie Mae, in the firm’s latest report.
In terms of home price forecasts, Fannie Mae’s 10.8% prediction remains in the middle of the pack.
As you can see there is a lot involved in buying 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 usually, they will.