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Ask Adam: The Upfront Costs of Home Buying

by ARLnow.com July 10, 2012 at 11:00 am 6,355 25 Comments

Editor’s Note: This periodic sponsored Q&A column is written by Adam Gallegos of Arlington-based real estate firm Arbour Realty. Please submit follow-up questions in the comments section or via email.

Question: We are thinking about purchasing our first home and are wondering if you can help us budget for the upfront costs of buying a home?

There are going to be some variables involved depending the size of the home, price and amount you plan to use as a down payment. That said, I’ll do my best to give you a general idea of the costs involved in purchasing a home in Arlington.

Different loan programs are available that require a down payment of 0%, 3.5%, 5%, 10% and 20% or more. You will need to discuss the different options available to you with a loan officer that you trust.

Your closing costs are likely to be between 2% and 3% of the purchase price.  Closing costs include:

  • lender fees
  • title fees and insurance
  • prepaid interest
  • prepaid insurance
  • prepaid property taxes
  • prepaid mortgage insurance (if applicable)
  • government recording and transfer charges
  • survey (if applicable)
  • association dues / reserves (if applicable)

If you negotiate a closing cost subsidy, it will go towards paying for the above mentioned closing costs.  Your lender should be able to provide you with a loan scenario worksheet that will itemize the closing costs and monthly costs for your individual situation.  There are also online closing cost calculators available, like this one from RGS Title. I recommend always consulting with your lender before negotiating a closing cost subsidy so that you are aware of any restrictions they may have.

By closing towards the end of the month, you can reduce the amount of prepaid interest collected at settlement.  You also have the option of purchasing owner’s title insurance or not.  Be sure to ask whether there is more than one type of policy. Many title companies present you with their “enhanced” policy by default, which may not be worth the extra money to you.

The lender may require you to pay the appraisal and application fee at the time you make application for your loan. Budget about $450 for these costs.

I highly recommend purchasing a home inspection. The cost of a home inspection ranges depending on the type, size and (sometimes) the cost of the home.  I recommend budgeting $300-600 for the home inspection. I honestly have no idea what the cost of the home has to do with the cost of a home inspection, but I have seen this come into play.

You may also want to purchase a radon inspection. The cost of a radon inspection is about $175. If you are not familiar with radon, the EPA publishes an online guide that you may find helpful.

The termite inspection is usually covered by the seller. If you decide to pay for your own termite inspection, the cost ranges from $35-$60.

Some real estate firm charge a transaction fee that can range from $250-$500. It’s a junk fee that goes to the real estate brokerage. Arbour Realty doesn’t charge a transaction (or similar) fee, but some of the other firms do so you should probably include it in your budget or negotiate it out of your costs. I recommend the latter.

Of course you should budget moving costs as well — whether that comes in the form of professional movers or pizza and beverages for your friends. If you buy a condo, they often charge a move-in fee that can range from $100-$200.

Painting, furnishing, decorating, housewarming party… are all personal preferences, but things you may want to take into consideration.

I hope this is helpful. You’re welcome to email me any specific questions you have about the cost of buying a home.  Please include in the comments anything I may have left out.

  • Autoexec.bat

    And prepare for every party to the transaction to pad the bill with random BS charges. Also prepare for your closing agent to “forget” certain charges that’ll pop up a few days before closing, like the jabroney closing agent who forgot to add about $1300 worth of taxes until 3 days before closing during my first refi.

  • T:GEOA

    The main thing you need to focus on is gettting a GFE Hud1 that you can trust.

    Research your lender to find out if people get surprises at closing. Or use a good lender like Provident.com

  • Lee-n-Glebe

    Adam – just wanted to say that I think you do a very nice job of explaining things that seem basic, but which a lot of people are a little embarrassed to admit they don’t understand.

  • John Fontain

    Adam – Kudos for the point about the junk administrative fees.

    I’d also recommend independently hiring the inspector rather than taking the referral of an agent. With a referral, you run the risk of an inspector not identifying problems because of the risk of the deal falling apart and their natural incentive to want the stream of agent referrals to continue. Not saying this will happen, but it’s best to avoid the risk.

    • Tabby_TwoTone

      Totally agree.

      • kramva

        Agreed. Learned this one the hard way.

    • Zoning Victim

      I made that mistake. If you do hire a home inspector, don’t rely on them to find stuff. That’s a mistake I made, too. I figured he’d find whatever there was to find, so I didn’t notice things like water spots on the ceiling that were dry-brushed over. Do your own inspection before the home inspection (if you get one) and if you see anything that looks wrong, ask him AND a professional who works with whatever you think you found wrong (roofer, HVAC technician, electrician and etcetera).

    • Greg

      Yes, do a very detailed self visual inspection noting cracks, spots, and moisture, in particular. I wouldn’t trust a real estate agents recommendation. I searched long and hard and came across JD Grewell, who has a great reputation and is or was the President of the American Society of Home Inspectors. He’s inspected the homes of presidents, senators, governors, you name it. He noted several things in the inspection report I didn’t see (not surprising) but more importantly I haven’t found any issues he didn’t note in the report. As far as I know, he does all the reports with an apprentice and doesn’t send his underlings to do his work.

  • PikerGirl

    Good website to learn about mortgages:
    http://www.mtgprofessor.com

  • PL25rd

    We learned about not trusting a home inspector referral from an agent the hard way. We’re replacing our whole HVAC system a year after closing, and were told that a lot of the issues (like not being installed up to code) should have been caught by the home inspector…but weren’t. And of course, our inspector was a referral from our real estate agent.

    Said agent also charged a $350 “transaction fee” – apparently that’s “Long & Foster policy.”

  • Douglas Parker

    Don’t forget to budget for all the crap that was either missed in the Home Inspection, or broke immediately when you take ownership of the house.

    Also be leery of home warranties. AHS – ‘never there when you need us!’

    • Tabby_TwoTone

      Yeah, I was persistent, and got *some* credit for a new fridge when mine died.

  • Zoning Victim

    If you’re buying an old house like mine, which was built in 1957, I’d insist on having a company come in and make sure the HVAC system is properly sized, and I’d have a company that specializes in doing home energy inspections come in and check that the home is properly insulated and sealed. Many older homes have no or terrible insulation, no sheathing under the siding (this allows direct air exchange with the outside) and retrofit central AC systems that have improper ducting and/or the wrong tonnage for the home. All of those problems are extremely expensive to fix in the short term and extremely expensive to not fix in the long term.

  • sunflower

    and be sure to watch several episodes of “holmes on homes” for a beyond reality check

    • CW

      “Soooo ya can see heeeere thot tha sewer water from the second floor is runnin right down heeere into the kitchen…not up to code. Code says noooo sewer water in tha kitchen.”

  • ballsteve

    Or just ask Holmes on Homes to come check it out for you….

    • Clarendon Skank

      His son is cute.

  • I also recommend a home warranty. I usually purchase one on behalf of my client to avoid any surprises their first year in the home. They run anywhere from $320 – $500 and are renewable, but after one year you should pretty much know how your systems are running. I recommend Old Republic but all of them are pretty much the same. Hope that helps!

    • Greg

      Wish I looked into this, though I’m skeptical why they cover if they’re that cheap. It can cost 100 bucks just to get a plumber or electrician to come to your house, let alone fix something. Only way a home warranty company can make money, as far as I can guess, is if very little is covered?

      • Douglas Parker

        Greg – I can tell you from experience that home warranties are basically shell companies that take your premiums and fight you tooth and nail when you make a real claim. Basically it goes like this:

        A simple repair – there is a deducatble, usually $50-60. They send one of their approved technitians to make the repair. They are not bound to send someone with in a certain timeframe. So for instance, your AC goes, you could be out of AC for days before someone has a look. Then, if they do repair it they bandaid your machine together and string that puppy along for all it’s worth to avoid a major repair. You will be calling them again and again, which brings me to the next scenario…

        A major repair – The home warranty company is in business with the technicians they send to your house. The technicians are incentivised by the warranty company to keep costs down. They invent, spin, distort the material events just enough to contend that your appliance is not compliant with their warranty requirements and they DENY your CLAIM.

        If you don’t believe me, just do a simple google search of American Home Shield and read the copious complaints/letters from unsatisfied customers.

        The bottom line – the amount you would spend on an annual premium in addition to the deductable you will have to pay will average out to MORE than you could expect to spend if you had to repair or simply replace the appliance yourself. SAVE YOUR MONEY.

        Need more proof? American Home Shield just lost a MAJOR class action lawsuit in which they are required to review all denied claims from 2001-2009 because it was proven in court that 1) they gave kickbacks to realtors to give policies away to new home buyers and 2) systematcially either underpaid or flat out denied covered claims.

        • sunflower

          agree 100%!! from experience, save your money to put toward potential repairs/replacement

      • sunflower

        many policies sold, few claims submitted ( and many of them denied)

  • BTW, transaction/processing/administrative fees charged by a real estate company are negotiable by the client. Most agents just (like me) usually just pay this on their client’s behalf.

  • KG to the power of 3

    Ask Adam…out? why, yes i shall

  • Good stuff here. Although this isn’t truly necessarily, it’s usually recommended to try to have at least an extra $10,000 or so for any unforeseen things that might crop up, even though those things are supposed to be taken care of by the seller.

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