Whether you're buying your first place or you're upgrading to your next home, it never hurts to review what costs you will incur outside of just the downpayment. I put together this list to help you anticipate the unanticipated, ideally. Keep in mind this list is curated for New York State specifically, but I'm sure it will give you some ideas to think about if you are looking to buy in another state as well. Please, as always, do your own due diligence. Check it out.
Photo by Alexander Grey on Unsplash
Inspection: In New York State this is paid BEFORE you go to contract. It's non-refundable and paid out of pocket. If you choose to walk from the property, the seller will not reimburse you. This is just the cost of doing business.
There are several different types of inspections. A general inspection is what you start with, but the inspector may recommend further inspection by a specialist if they find something concerning.
Additional tests they will offer you (for additional cost of course) include, but are not limited, to radon test, water test, septic test, termite test, etc.
Deposit: This is the money you put down on a property during escrow. In New York State it is generally held in the seller's attorney's escrow account until the end of the transaction. This money is used to give the seller peace of mind. If you can't deliver on your purchase, as per the terms of the signed contract, this money is then awarded to the seller as a way to compensate them for lost time tying up the property.
Downpayment: This is the amount of money the bank (or other type of lender) requires you pay out-of-pocket in order to secure the loan.
Deposit and downpayment are often used interchangeably but they are two different things. If you agree to a 20% downpayment, you can usually put just 10% down as a deposit. You always want to put down as little of a deposit as possible if you can.
Appraisal: This is paid out of pocket from you after you apply for your loan and are in contract. Your lender will order it, but they will send you an invoice for it. The purpose of the appraisal is for the bank to verify the property at least worth what they are lending you to buy it. It is how they make sure they are protecting their interests and that the loan isn't too risky. Because this goes to a third party, and is needed for the bank to approve the loan it is not wrapped into the closing costs. It is paid out pretty early in the process, just after you go to contract in New York.
Attorney: New York requires that you use a real estate attorney. They usually charge you a flat fee for the overall transaction. That number is decided up front. You don't pay the attorney fee until the deal has closed though. If you do not end up closing the deal, but you did start the process, usually you will owe part of the fee to the attorney.
Homeowners Insurance: In New York State, you are required to have insurance in place for the day of the closing. You must pay the full year in advance. This will come out of pocket beforehand so that you have proof of insurance at the closing table. Then, the lender usually escrows the next year so that when the next bill comes due, they already have the money in the account and can pay it directly on your behalf.
Title Insurance: This is critical, and most people don't know why it's so important. Title insurance protects you against someone selling you a property they aren't legally allowed to sell you. If someone down the line comes and tries to lay claim to the property, title insurance will protect you. In New York State, your attorney will order it, but you will pay it on closing day along with your other closing costs.
Points: Lenders often require you to pay points to close the loan or you can sometimes pay points to buy down the rate. One point equals 1% of the overall loan. Depending upon the terms of your loan, you may have to pay a few points. If so, those are included on closing day with your overall closing costs.
Survey: This is a piece of paper that illustrates where the property lines are when you are buying and if there are any easements or encroachments on the property. Sometime a seller will have one, but not always. You have the option to purchase one if you want. You don't always need to but it is recommended if you plan to build on the property for sure.
Real Estate Agent Fees: Usually this is covered by the seller. It is becoming more common, though, to pay part of a buyer's agent's fee if the seller doesn't have the property listed for a full 3% split. Most top agents will not work for less than 3%. So you may end up paying .5% or 1% depending upon which house you select. Your buyer's agent should communicate when signing your Exclusive Buyer's Representation Agreement at the beginning of your search.
Transfer taxes: This can vary based on location so you will need to speak to your attorney about what the specifics are in your area. It is highly nuanced. Usually it's the seller who pays these, but in new developments, this cost often gets pushed to the buyer. So just keep an eye out when the contract goes out to make sure you are aware of any additional taxes you will be responsible.
Also note that it is common for you to bring money for town and school tax to the closing table. The seller will usually have already paid them for the year, but you will be responsible for the prorated cost from the day you take over. Depending upon what time of year you close and what time of year taxes are collected, this number could vary widely.
Oil Tank Reimbursement: If you are purchasing a house with an oil tank, you will be responsible to pay for the remaining oil in the tank on the day of closing. (Unrelated advice, but you probably will want to swap that out and decommission the tank as soon as possible... oil can be EXPENSIVE.)
Hidden Fees: All banks have different filing fees. This is related to filling the deed with the town, paying their lawyer's fees, etc. This can vary widely and it is very hard to compare when it comes to different lenders. All these fees should be documented though in their initial estimate that they are required to send you by law early on in the process. I wish I could give you better advice here but this is something you just have to make note of with the initial estimate and know this is usually the cost of doing business. They are typically due on closing day.
PMI: This is private mortgage insurance. And although it's not technically a fee you pay until you close, it's worth mentioning. It is an additional cost that banks will charge you if your downpayment is less than 20%. The reason for this being is that means your loan is riskier. You have less skin in the game and therefore are more likely to walk away if time gets tough. This added cost is an insurance that covers them should you default on the loan. Speak to your lender to see if you will be charged that.
Lastly, two final tips to keep in mind:
1) Your first mortgage payment won't be due until the first day of the month after you close. So if you close on February 12th, your first payment isn't due until April 1st. Why? Because the bank rolled your first payment into your closing costs already. So technically, you did already pay it. That usually gives you enough time to get settled and enough time for them to potentially sell the loan to another lender before you start paying.
2) Your bank will require you to have a back up emergency fund in addition to all these other costs. The amount varies from bank to bank. Also the form varies from bank to bank. Some banks allow you to use your retirement account if there is a way you can take a loan from it. So again, you just have to ask your lender what that number is in the beginning so that you are aware when they are in the process of qualifying you for the loan.
I share all this not to overwhelm you, but just so you have a full picture of what costs buying a home actually entails. I didn't know about a lot of these when I was in the process of buying my first home and I was horrified and scared to learn of them as I went when I was making the biggest purchase of my life (up to that date). So just know you will need your deposit, but you will also need some money set aside in addition to that to cover these costs. And remember, everything in life is negotiable. So negotiate with your lender on some of these items if you can. It's worth a try.
Good luck and comment below if there are any other potential costs that I may have overlooked. :)
Forever grateful,
Mack
Great info!