During a conversation today with a client I mentioned a few things regarding a Buyer’s up front costs when purchasing a home that I thought might be easier to comprehend if I put it on paper so I wrote her an email with the following information. This client has not bought or sold real property and they are very unfamiliar with the terms so the following is information I provided in an email. Additional data has been provided for this blog.
Glenda and her husband Mike are buying a new home. They have been looking for months with no success and feeling quite discouraged. The real estate market in Dallas is a Seller’s market and finding any property available in their price range and desired location is difficult as there is very little for sale. Their search is made even more challenging with the large number of buyers competing for the same houses.
Just the Facts
On the bright side, Glenda has done all her homework, including a Pre-Approval letter from her bank and has locked her interest rate for 60 days at 3.25% on a 15-year mortgage. She has set aside $45,000 for a Down Payment and another $10,000 for Homeowners Insurance and other Closing Costs.
The house they are considering is offered for sale at $220,000 and there are three other Buyers for the same house. Glenda and her husband are requesting an Option Period of 10 days and are offering $100 for that Option Period. They are also requesting a Home Inspection that will be scheduled during that 10-day Option Period. Their Earnest Money will be 1% and Down Payment is 20%.
|Glenda’s Scenario – Initial Outlay of Cash|
|15-Yr Conventional Loan @ 3.25%|
|Home Inspection Fee ($275-$750)||$350|
|Earnest Money (1%)||$2,200|
Glenda and her husband will be paying their homeowners insurance and property taxes outside of escrow and they have opted for a 15-year Conventional loan. Their lender is requiring an Appraisal and Glenda will have to pay the Appraiser at the time of service. The Lender is charging Glenda and Mike an Administrative Fee of $1,095 for loan processing. Glenda and Mike want to pay their homeowners insurance and property taxes directly to those providers rather than have the mortgage company collect them monthly with their Principal and Interest payments.
Out-of-Pocket Costs Up Front
The first out-of-pocket expense that Glenda and most buyers here in Texas submit is called an Option Fee and this is submitted with the contract when negotiations have concluded. The good news about this fee is that here in Texas the Buyer submitting an offer can request an Option Period and secures that with the Option Fee. This Option Fee is Non-Refundable to the Buyer but is most frequently applied to your Down Payment at Closing.
The value of this Option Fee is that it does buy you a number of Days in which you have the Option to back out of the contract. In the scenario above Glenda has requested 10 days for $100 but the number of days and the amount of the fee is negotiable between Buyer and Seller; it is not a set fee nor a prescribed number of days. Glenda, like most buyers, will perform inspections during this Option period. If she chooses to go forward with the contract after 10 days then the $100 is applied to her Down Payment.
After the Seller’s acceptance of Glenda’s offer she will be scheduling the Home Inspector, the Appraiser and the Surveyor if needed (and any other potential inspection such as a pool, septic, HVAC, Foundation, etc.). Glenda’s first check that she’ll write is $100 for the Option Period of 10 Days. That check is made out to the Seller and is receipted by the respective real estate agents.
Earnest Money is also taken at the conclusion of contract negotiations and is typically 1% which would be $2,200 in Glenda’s scenario ($220,000 x 1% = $2,200). Submittal of the Earnest Money should be done as soon as the contract is signed and all terms are agreed but certainly not later than completion of the 10-day Option Period and all parties are in agreement to move forward.
Earnest money is typically the 2nd outlay of cash for the Buyers and should be in good funds such as a Cashier’s Check or preferably and ACH transfer from your bank to the Title Company holding escrow.
The next money out-of-pocket for the Buyer, in this case Glenda and Mike, would be for any Inspections that are to be performed during the 10 days of Option Period. Typical inspections during this timeframe are Home Inspections, Foundation Inspections, HVAC Inspections, etc. These inspections are not required by law but are highly encouraged. And, there is no warranty associated with these inspections.
Glenda will schedule the Home Inspector to provide a thorough examination of the home and has agreed to pay $575 at the time of service. Glenda and Mike will be in attendance for the inspection and will receive a detailed written report in electronic format. Her inspector will review each and every item of the report in great detail with her and Mike immediately following the inspection.
Most Lenders require an appraisal to assure the property truly is valued as high as the parties to the contract think. This may be the 3rd or 4th out of pocket expense for Glenda and Mike ($100 Option Fee was 1st, Earnest Money was 2nd and Home Inspector or Appraiser is typically 3rd).
Down Payment is the term used for the Big Chunk of money that the Buyer pays up front on the purchase price of their home and ‘brings to the table’ at Closing in addition to other Closing Costs.
Glenda and Mike are purchasing their new home for $220,000 and the Down Payment is 20% so the amount of their Down Payment is $44,000.
This Big Chunk of Money (Down Payment) is paid when you go to Closing. This is when the Taxes (probably 6 months), Insurance (most likely 14 – 16 months), Financing Costs such as Doc Prep Fee, Attorney Fees, Recording Fees, etc are due in addition to the remaining Down Payment.
However, the Option Fee may be applied to the Down Payment as well as the Earnest Money. So, in this scenario, Down Payment is $44,000 less the Earnest Money of $2,200 already paid and Option Fee of $100 already paid so the Buyer would have a balance of their Down Payment due at Closing of $41,700. The cost of Appraisal and any Inspections do not count towards the Down Payment as those are services performed and being paid at the time of service.
If, unlike Glenda’s scenario, you have Zero Down financing then the Option Fee and Earnest Money, if already paid, would be applied to other costs (like Taxes, Insurance or Finance Cost).
|Down Payment (20%)|
|Down Payment (20%)||$44,000|
|Earnest Money (1%)||$2,200|
|Total Down Payment Due At Closing||$41,700|
See my other blog Taxes and Insurance At Closing for information regarding payment of taxes and insurance when closing on your new home.
Other costs involved with Closing such as Transfer Tax or Recording Fees will be addressed in a separate blog.
Brenda Patton is a Texas-Licensed real estate agent with Ebby Halliday, REALTORS located at 1415 Legacy Dr, Ste 100, Frisco, TX 75034. Her office number is 972-335-6564 and cell/text is 469-408-3148. You may also reach Brenda via email at firstname.lastname@example.org.