Upfront Costs of Buying a Home: Earnest Money, Inspections, and Appraisals
When you're buying a home, it's important to understand the upfront costs you'll encounter before reaching the closing table. While many of the expenses are settled at closing, there are some costs you'll need to cover right away, including earnest money, home inspections, and appraisals. These steps help protect your investment and ensure you're making an informed decision.
Earnest Money: Your Good Faith Deposit
One of the first out-of-pocket expenses you'll encounter is earnest money. This is a deposit you provide when making an offer on a home to show the seller that you are serious about your intent to purchase. While the amount can be negotiable, it typically equals around 1% of the home’s purchase price.
If your offer is accepted, the earnest money is held in a trust account and will be applied toward your down payment or closing costs. However, if your offer is contingent on certain conditions (like inspections or financing) and the deal falls through for one of those reasons, you’ll usually get the earnest money back. On the other hand, if you back out of the deal for a reason not covered by your contingencies, the seller may keep the earnest money.
Home Inspection: Ensuring Your Investment
A home inspection is one of the best ways to make sure you're making a sound investment. While this is not a requirement, it’s highly recommended that you have a professional inspect the home to identify any potential issues.
The cost of a home inspection can range between $200 and $500, depending on the size and complexity of the property. This fee is paid out-of-pocket by the buyer at the time of service, not at closing. The inspection usually includes an evaluation of the home’s structure, plumbing, electrical systems, and overall condition. If you’re buying a home with a well or septic system, or if you’re concerned about radon or mold, additional inspections may be necessary, which could add to the cost.
What Happens During a Home Inspection? Typically, home inspections are scheduled within 5 to 10 days after your offer is accepted. The inspection itself takes between two and four hours. While you’re not required to attend, many buyers find it helpful to be there for the last part of the inspection so they can walk through the findings with the inspector.
After the inspection, you’ll receive a detailed report outlining any issues with the home. If the inspection reveals significant problems, you can negotiate with the seller for repairs or a price reduction to cover the cost of fixes. If the seller refuses to make the necessary repairs and the issues are significant enough, you may choose to withdraw your offer, depending on the terms of your contract.
The Appraisal: Protecting Your Financing
If you’re financing your home purchase with a mortgage, your lender will require an appraisal. The purpose of an appraisal is to ensure the home is worth the amount you’re borrowing, which is crucial since the property itself serves as collateral for the loan.
The appraisal usually takes place after the inspection is complete and you’ve decided to move forward with the purchase. Unlike inspections, the appraisal is ordered by the lender through a third-party company to ensure impartiality. The cost of the appraisal typically ranges from $300 to $600, and, like the inspection, it’s paid for upfront by the buyer.
What Happens if the Home Doesn’t Appraise? If the appraised value of the home comes in at or above the offer price, you're good to go. However, if the home appraises for less than the agreed-upon price, it can complicate things. Here are your options:
1. Renegotiate the Price: The most common solution is for the buyer and seller to agree to reduce the sale price to match the appraised value.
2. Pay the Difference: If the seller won’t lower the price, you can choose to cover the gap by paying the difference between the offer price and the appraised value in cash. This option is less common, as most buyers don’t want to overpay for a property.
3. Request a Reappraisal: If you or the seller believe the appraisal is inaccurate, you can appeal the appraisal or pay for a second one. However, there’s no guarantee that the second appraisal will come in any higher than the first.
4. Walk Away: In some cases, if you can’t come to an agreement, you may choose to walk away from the deal. If your contract includes an appraisal contingency, you can terminate the agreement and retain your earnest money.
Conclusion
Understanding the upfront costs of buying a home—such as earnest money, inspections, and appraisals—can help you plan your budget and avoid surprises. These costs are an important part of the homebuying process, helping to protect your investment and ensure the home you’re purchasing is worth the price. By staying informed and working closely with your real estate agent, you can navigate these steps with confidence.
If you have any questions or are ready to start your home search, contact Tyler Johnson and Live Idaho Realty of Silvercreek Realty Group at 208-890-0640 or send an email today. I’m here to guide you through every step of the homebuying process!
