5 Costs Before You Close

1. Earnest Money
Earnest money is good faith money showing the seller that you are serious about your offer. My rule of thumb is to recommend $1,000 for every $100,000. If the house is valued at $205,000 then I would recommend $2,000 in earnest money. In my market, this earnest money check is held in the escrow account of the buyer brokerage until closing.

Make sure you ask your Realtor ways that you could lose your earnest money. If all goes well, you should receive your earnest money check back at closing or it can go toward some of your closing costs. You could lose your earnest money check if you decided to back out from purchasing the house, say a day before closing for no reason. There are several ways to receive your earnest money back if the deal goes bad, but make sure you have your Realtor explain the different scenarios where you could lose your earnest money.

2. Inspections
Ask your Realtor which inspections are relevant to your property. Consider focusing on the HVAC, roof, electrical, and foundation. Your Realtor should let you know how much inspections cost in your market. I let me clients know to expect to spend about $300-$500. This is going to depend on whether or not there is a pool, well, septic tank, structural issues, and much more.

3. Appraisal
If you are using a loan, then the contract is going to be contingent on the home appraising for the loan amount. The bank will only lend the amount that the house appraises for. In my market, the appraisal will cost around $500.

If a house is being purchased at $200,000 and the appraisal comes in at $205,000, then the buyer has instant $5,000 equity. If the appraisal comes in at $195,000, then the buyer would need to either bring $5,000 to closing or the seller will need to lower the contract price. ​

4. Downpayment
The down payment is going to depend on your loan. In a VA loan or certain state housing programs, you may qualify to put $0 down. In a FHA loan or conventional loan, the down payment may be as low as 3.5% or 5%. You can always put down as much as you’d like, but your lender can go over your estimated mortgage payment, interest rate, and down payment.

5. Closing Costs
Depending on how strong my buyer’s offer is, I recommend asking the seller for some closing costs. This is negotiated up front with the offer. If my buyer is fortunate, then they may have all of their closing costs covered. These costs include, but not limited to mortgage insurance, homeowner’s insurance, loan origination fees, pre-paids, recording of the deed, taxes, and title insurance. 

I know it may seem like expenses are starting to add up before you've even moved into your home. Have your Realtor go over some of these expenses upfront, so that you don't feel blind-sighted each time you write a check.