Pursuing homeownership is an exciting and rewarding journey. It is tempting to jump right into viewing houses that you like, but it is critical to establish your budget before you start looking. You want to make sure you aren’t wasting your time (or your realtor’s time) and minimize your disappointment. After all, it can be disheartening to fall in love with a house only to realize you cannot afford it. Your lender will approve you for a specific loan amount, but keep in mind that the cost of your mortgage is not the only cost you need to budget for. Many upfront costs comprise your closing costs and should be considered to avoid having to back out of a contract.
What are Closing Costs?
Closing costs are all the services and payments you need to make before your house becomes yours. These various fees and services can total around 2-5% of the house’s value, so it’s critical to budget for them when looking at houses.
Earnest Money
This is a certain amount of money that you offer to the seller upfront to show how interested you are in the house. The earnest money will be subtracted from the total cost of the house if your offer is accepted. However, if the seller accepts your offer but you later need to back out of the contract, you will not recoup the earnest money you put down. Only put down money that you are willing to part with should things not work out.
Origination Charges
Whether your lender is a bank or private company, they will likely charge you origination. This encompasses application fees, the cost of processing and underwriting your loan, and other miscellaneous items. Talk with potential lenders to get an approximation of their origination charges and other upfront costs.
Service Charges
There are various services and inspections you need to perform on the house as part of your due diligence while under contract. First, the home needs to be appraised to determine its value. Keep in mind that if the results of the appraisal value are below the price you bid for the house, price negotiations will need to be made with the seller or you will need to pay the difference out of pocket. Most lenders also require that you have at least a home inspection and pest inspection performed. Other inspections are available as well, such as radon, flood determination, and property surveys.
Government Fees
Transfer taxes and recording fees need to be paid. These fees cover the title transfer and for the changes to be recorded in the county register of deeds.
Escrow Payments
Lenders will usually have you prepay your first year of costs, such as homeowner’s insurance, property taxes, and HOA costs. These payments are made at closing and held in escrow so that your lender can pay them over the next year.
All of this contributes to your “cash to close,” which is the total amount of money you owe when you sign the documents to buy your house. All of the above charges added up, minus the money you gave upfront in earnest money, comprise your cash to close.
Are There Options to Upfront Costs?
Many people find that renovating their current home is more cost-effective than purchasing a new home. Should you decide to explore the possibility of renovating your kitchen, bathroom, or outdoor living space, call West Coast Design Build Florida. We are proud to provide expert design and installation services in the greater Sarasota area.
