What are buying house fees?
So you’re interested in buying a home, and want to know what are all the buying house fees outside of the down payment? Well, you’ve come to the right place! The down payment gets a lot of attention, and rightfully so. It’s typically the largest sum of money you’ll ever have to pay in your lifetime. It is usually the highest barrier to entry for individuals to become homeowners. Meanwhile, being a homeowner has notably been one of the greatest wealth building tools.
That being said, it’s important to note that the down payment is not the only expense when buying a home. Home buying fees are not to be overlooked, especially when buying in high cost of living areas. So, what are the home buying fees?
This post is about buying house fees.
Let’s dive into the top 7 buying house fees.
1. Appraisal Fee
The intent of this is to determine the fair market value of the property. This is a fee that’s paid to a professional appraiser. This only applies if you’re borrowing money to purchase the property. The reason for that is because the lender wants to make sure the property is worth the amount being requested to borrow. Lending money is a risk, and the lender wants to make sure that in the case the borrower defaults on the loan and the lender must foreclose, they’ll still be able to recover. Again, the appraisal fee is usually requested by the lender. So if you’re not borrowing money to purchase the property, this fee will not apply to you.
The appraisal process includes assessing a property’s value based on the size, location, comparable properties, and condition.
2. Home Inspection Fee
The intent of this is to evaluate the condition of the property and identify any issues to be addressed prior to closing. This inspection is beneficial to the buyer and to ensure that the property is in the state the buyer is satisfied with purchasing it in. If there are issues that are identified and the buyer would like them addressed prior to closing, this would be the time to mention them. The reason this is the time to mention them is because the issues identified could be used as leverage in negotiating with the seller or back out of the sale entirely.
The home inspection is quite important and provides information that could help prevent costly fixes found later on. Something to keep in mind is that this is one of the factors that can be waived to increase the competitiveness of a buyer’s offer. This was a popular move when the housing market was very competitive (when interest rates were hovering around 2-3%), buyers were putting in offers that were well over the asking price. When that’s not enough, some buyers opted to waiving the inspection. Again, not something to overlook, but something to keep in mind. Especially when the market is competitive for buyers (i.e. a seller’s market).
The home inspection typically includes evaluating the roof, plumbing, electrical, heating, cooling, foundation.
3. Earnest Money Deposit
Earnest money is a way of showing the seller how serious the buyer is of purchasing the property. The earnest money deposit is usually a percentage of the purchase price, ranging from 1-3%. The earnest money is a deposit the buyer provides to the seller.
If the sale continues and goes as planned, the earnest money deposit gets applied towards the purchasing price. However, if the buyer decides not to proceed with the purchase, depending on the reasonings, the earnest money deposit could be forfeited. As with most things in the home buying process, the amount for the deposit and terms are negotiable.
4. Property Tax
Property tax is usually a percentage based on the value of the property, and is paid on a semi-annual or annual basis. Depending on the state, the percentage can be based on the assessed value or a flat fee (per square foot). It’s important to note that the property tax does not contribute to the property’s equity, and should not be easily overlooked when looking to purchase a property.
5. Homeowner’s Insurance
Similar to apartment insurance that’s required by apartment complexes, homeowner’s insurance is usually required by lenders. Similar to the appraisal fee, the intent of the homeowner’s insurance is also to protect the lender’s investment in the property in the case the buyer defaults. Homeowner’s insurance essentially provides protection against damage to the property or possessions within the property. It’s to help cover (some of) the repairs, fires, theft, natural disasters, and more.
The cost of homeowner’s insurance can vary based on the level of protection/coverage, as well as the location, age, and condition of the property.
6. Option Fee
The option fee is provided by the buyer for the right to buy the property during a specific period of time. It is also this period of time that the buyer has the right to terminate the contract. This period provides the buyer sufficient time to execute their due diligence in evaluating the property.
7. Private Mortgage Insurance (PMI)
Private Mortgage Insurance is only applicable when the buyer puts down less than 20% for their down payment. This is where you hear a lot of people emphasizing the 20% needed for a down payment, because if you put anything less, you’ll be required to pay PMI. This is intended as protection for the lender, again, in case the buyer defaults on the loan.
To reiterate, the top 7 buying house fees are:
- Appraisal Fee
- Home Inspection Fee
- Earnest Money
- Property Tax
- Homeowner’s Insurance
- Option Fee
- Private Mortgage Insurance (PMI)
There you have it! Interested in learning more about how to save up for the buying house fees? Check this post out for how many bank accounts should you have.
Hey!
Interested in seeing more? Check out our Instagram, Pinterest, and Twitter below!
