There are three basic categories of costs that will occur throughout the escrow process:
1. Down Payment
2. Earnest Money
3. Closing Costs
Earnest money is money you submit to the title company for the seller within 1-2 days of going under contract. It’s shows that you’re serious about buying the house. The idea is if you default and terminate the purchase contact outside of one of the allowable provisions, the seller can keep your earnest money. Earnest money is usually 1-3% of the purchase price.
A down payment is money you pay to the seller upon closing that immediately goes towards your purchase. If you buy a $300,000 house and you are paying 3% down, you would pay the seller $9,000 and your lender would pay the seller the remaining $291,000 on your behalf.
It seems most potential home buyers worry most about the down payment. The widespread belief that you must have 20% of the purchase price (*for an owner occupied primary residence) is not true. Many first time home buyers put just 3% down. The FHA and Conventional Loan programs only require 3.5% and 3% down respectively while the VA Loan requires 0% down.
Closing costs are roughly 2-4% of purchase price and include two major categories of expenses:
1. One Time Costs & Fees
2. Escrow & Prepaid Expenses
- One Time Costs & Fees:
One Time Costs and Fees include a myriad of items such as loan origination charges, the lender’s title insurance, an appraisal, a credit reporting fee, a closing fee, and a survey. All of these are transaction costs that allow you to purchase a home.
- Escrow & Prepaid Expenses:
Escrow & Prepaid Expenses include: prepaid home owner’s insurance, prepaid interest on the loan, mortgage insurance charges, escrowed property taxes, and an owner’s title insurance policy. These are charges that are paid at closing in advance for services, or money your lender holds to pay off anything that could cause a lien on your new home (property taxes, utility bills, etc.) The idea is if the lender has payment for those services ahead of time, the lender can pay them; from the lender’s perspective, this makes it less likely a lien will be placed on your home in the first few months after closing which could threaten the loan.
Inspections & Moving Costs:
Home inspections generally run $300-$600 and are generally paid at the time of inspection, not at closing. Don’t forget about moving costs. Whether you’re renting a moving truck and doing it all yourself or paying a moving company, you’ll need some cash for moving costs as well.