Author’s note: This is a selection from my new book, How To Buy A Home and Not Lose Sex: Find the Best House, Make the Best Offer, and Keep Your Love Life, which you can purchase on Amazon by clicking here.
Last week I covered the down payment and the costs of hiring a Realtor. Over the next few weeks I’m going to cover all the closing costs. This week I continue with the money you need upfront and prepaid closing costs.
How Much Money Do I Need Up Front?
If you are getting a loan, a good rule of thumb for all closing costs, including your “prepaids” (more on what those are later), is 3%–4%.
So if you are buying a $200,000 house and getting a loan, regardless of what you put down you still might see $6,000–$8,000 in closing costs in addition to your down payment.
Most closing costs are generated by loans. If you are paying cash for the home, your closing costs will be minimal (compared to what they would be with a loan).
Fees for a cash closing might include fees the closing company or closing attorney charges for their services, possibly the owner’s title-insurance policy, and any taxes your state charges to buyers.
Let’s take a more exhaustive look at closing costs right now.
Note: In my part of the country, it’s called “closing”; in other parts of the country, it’s called “settlement.” Regardless, it refers to the day you actually sign the papers to buy the house.
The Binder Deposit (a.k.a. the Good-Faith Deposit, EDM, or the Earnest-Money Deposit)
When you make an offer on a home, the first check you’ll probably write is for something called the “binder deposit.”
Note: In my part of the country, it’s called “making an offer”; in other parts of the country, it’s called “putting in a bid.”
The binder is also called the “earnest-money deposit,” the “EDM,” or the “good-faith deposit,” interchangeably.
The binder is simply the money you put down in good faith when you make an offer. It tells the seller your offer is serious, and that they can have peace of mind if they take their home off the market so you can buy it.
The binder can be a nominal amount like $500, but if you offer $500 don’t expect your offer to be taken seriously. Typically it’s more like 1%–3% of the offer on a resale home. So if you were buying an $100,000 home, for example, for your offer to be considered at all expect to put down $1000 to $3000. Just this week I had some buyers put down 5% because they wanted the seller to know just how serious they were.
The binder deposit goes toward the purchase price and your total down payment at closing.
For example, if you are planning to pay a down payment of $20,000 (before any closing costs), and you put down a binder of $5,000, you will have an additional down payment at closing of $15,000, exclusive of any other closing costs.
In a later chapter, I’ll cover getting back your binder if the sale falls through.
Prepaid Closing Costs
At the time you make your offer, you’ll also be making a formal loan application. Loan applications in my market run around $400–$500 right now, of which $50 or so pays for the credit check, and the balance pays for the appraisal on the home you are buying.
From there, you move on to inspections. In my market, buyers typically do a general home inspection with a licensed inspector, a pest and wood-rot inspection with another licensed inspector, and now we’re even having a surveyor come out early in the process to get a flood-elevation certificate (because of recent increases in flood-insurance costs).
In your market, and depending where you live, you might not do the flood and pest inspections, but you might need an engineer to come out and inspect the structure, or an environmental company to come out to check on things like old heating-oil tanks.
The cost for these inspections could range from the hundreds to the thousands of dollars depending on how many you do. In my market, many of the general inspectors are dually licensed to do pest and wood, which saves customers money; thus total inspection costs here might be less than $500 for just the basics.
The loan application and inspections are called “prepaids” because they are considered closing costs that are paid before closing.
The other big prepaids are homeowner’s insurance (or the condo and townhome equivalents), the tax escrow, and the insurance escrow.
If you are thinking about buying a home, please consider hiring myself and my team as your Realtors. We can help you find the best house and make the best offer. Contact me at Sean@StAugTeam.com or my partner Kate at Kate@StAugustineTeam.com.