Understanding Home Buying Costs: Upfront, Closing, and Everything In Between

Upfront Costs Applied At Closing as a Credit:

• Option Fee: You have the choice to elect to have an option period where you can back out of the contract within a set amount of time for any reason (option to terminate). You pay for this option but you decide how much you pay and set that in your offer. Estimated Expense: Typically between $100 - $1000 for homes between $300,000 and $1M.
  • Legally, you will be able to exit the agreement during your option period which you set. But at 5pm on the date of the end of your option period, you are no longer in your option and if notice has not been provided to the sellers with your termination of contract, you are officially in contract. 
• Earnest Money: This is your promise via funds, to buy the home. You set this in your offer and is typically 1% of the offer price. You will owe this within 3 days of executory contract (offer that has signed by all parties). If you execute your right to terminate during your option period, this earnest money is refunded to you.
  • You should never put more down on earnest than you are willing to lose should you decide to back out of the contract after a set forth option period and all contingencies have been satisfied. But earnest money isn't the only ramification of backing out of a contract when there is no legal reason to do so... if the seller wants to, they could keep the earnest money and sue the buyer to perform the contract. In some cases, the seller will satisfy the termination by keeping the earnest money but they are not required to do so. Why would a seller not sue? There are lots of expenses in suing anyone. So if they feel the earnest money is payment enough for the breach in contract by the buyer and the cost of suing, not worth it, they may decide to accept the earnest money and not sue. It is never a good idea to back out of contract after option and contingencies have been successfully closed because you could be in for some significant costs.

Here is great source to read more on option and earnest money as well as contingencies to protect your offer and your money. https://www.newwestern.com/blog/can-sellers-sue-a-buyer-for-backing-out-of-a-contract/

Expenses Not Credited at Closing:

• Inspection: During your option period, you will want to have an inspection done. This info from the inspection can determine what we want to have the seller to do in order for you to move forward with your purchase. They have the right to decline your requests or agree to pay for you to conduct repairs or cover them as the sellers. This is an extension of the negotiation phase that your REALTOR will help you execute. Estimated Cost of Inspection: $300-$700
• Appraisal:
  • Cash Buyers: If you are paying Cash, you would want to have the appraisal done, if you desire one, during this time. This would give you confidence that the home is worth what you are offering but is completely optional for Cash Buyers. Estimated Cost of Appraisal: $300-$800 depending on size of traditional single family home.
  • Financing Buyers: Your lender will require you to have an appraisal if you are going to mortgage the property you are buying. This appraisal helps to ensure that the lender’s investment is sound and as such, so is yours. This is done after the option period for Financing Buyers. Estimated Cost of Appraisal: $300-$800 depending on size of traditional single family home.

Closing Costs:

• Cash Buyers: Cash Buyers have less to pay in closing costs because a good portion of closing costs relate to the financing of a property (obtaining the mortgage). But there are still some expense.
  • Recording Fees: This can be anywhere from $300-$3000 depending on the property you are buying.
  • Title Expenses could be covered by the seller or buyer depending on how the offer is structured. This can increase your closing expenses by $1500-$4500.
  • Prorated Taxes for time you will live in the home.
• Financing Buyers:
  • You will have expenses associated with acquiring your loan and this is usually 1% - 3% of the amount of the loan (not the offer price).
  • You will also have recording fees and the same Title Fees depending on the structure of your offer as listed for Cash Buyers.
  • Downpayment will also be an expense you will need to account for. Depending on your loan type and cash available, you will typically provide between 1% is the minimum but there are higher interest rates for the lower down payments. Conventional loans are typically between 5%-25% down payment on your accepted offer price.
• When will you know your estimated closing costs? Well that is where your realtor, your lender, and a title team come into play! When you apply for a loan, your lender will give you a loan estimate for your closing costs. You can shop lenders by the way to get your best deals. Your title team is also a great resource for sellers net take-home from the home. And your trusted Realtor can provide you rough estimations as well! 

Here is a good source to learn more: https://www.ramseysolutions.com/real-estate/texas-closing-costs

** This information is intended for general knowledge to help educate buyers on the expenses they may expect but it's encourage readers to seek professional guidance.