Part I of II: What does a Coastal Bend home actually cost?
By: Coral Dworaczyk
Homebuyers and sellers are often surprised to find out what it actually costs to buy or sell a property in our area. This summary pertains to the expenses typically incurred during your average real estate transaction in the Coastal Bend where real estate agents have negotiated a contract between a buyer and seller (with the seller typically paying agent commissions).
The next issue of Inspire Coastal Bend magazine will cover the basic expenses for sellers. Please note that many exceptions can apply, and buyers should always consult their lawyer or real estate agent for further explanation or advice.
To begin, buyers seeking a mortgage need to plan to have their down payment available before they start shopping for a property. Depending on the type of loan to be utilized, this down payment can range from 0 to 20 percent of the price of a home. In the case of a vacant land purchase, a lender could require a down payment of 20 to 50 percent of the price. Serious buyers should also contact a lender (if a mortgage is to be obtained) prior to home shopping to determine which type of loan will suit their home-buying goals best.
Once a home is selected and a contract is negotiated between buyers and sellers, the first money exchanged is typically the earnest money (payable to the title company selected) and the option fee (payable directly to the seller). The earnest money amount may vary from several hundred to many thousands of dollars, depending on the price of the property and the terms negotiated. This money is offered as a deposit of sorts to show the buyer’s willingness and ability to purchase the property.
In some cases, if the transaction were to fall through, the seller would receive this portion of the buyer’s money. If the deal closes successfully, this money is usually applied to the buyer’s expenses or refunded to the buyer. From the time of contract to closing, this money is held by the title company, an independent third party, until orders are issued for its disbursement.
The buyer may also negotiate for the unrestricted right to back out of the contract for a short period of time (usually five to 14 days) per the terms of the “termination option” in a contract, and a payment is typically paid to the seller for this right. If the buyer terminates the contract during the defined time limit, the earnest money is refunded, but the seller keeps this fee. If the deal closes, this money may be credited back to the buyer at closing. In our area, this fee is usually around $100 for most homes, but it may be more or less depending on the property and the timeframe.
Next, the buyer will usually arrange to have the property inspected. In our area, the average general home inspection is typically $350 to $450, usually varying with the size of the home. Buyers may also add accessory inspections to cover the home’s plumbing, heat/air conditioning, structural systems and foundation, roof, pool, septic, etc., or termite inspections. If a mortgage is to be utilized, the lender will require a buyer to order and pay for an appraisal on the property. The average home appraisal in the Coastal Bend is around $400, but some lenders may negotiate on expense of this report.
Homebuyers planning to buy a home utilizing a mortgage (versus paying cash only) are often surprised by the required closing costs or settlement expenses. There are two types of closing costs that are incurred by buyers: prepaid and fixed closing costs. Prepaid expenses are those related to homeowner’s insurance policies, property taxes and interest.
Depending on the type of loan and the lenders requirements, a buyer may be required to establish an escrow account to collect the property’s upcoming insurance and tax payments. In this case, the lender requires a buyer to put reserves in this account at closing, and then a portion of each month’s loan payment is deposited into this account. The lender then pays the property taxes and the homeowner’s insurance from this account when they are due.
Some loans and lenders do not require a buyer to establish this account. In that case, buyers are required to “self-escrow,” or plan to pay these expenses on their own. If these prepaid expenses and escrow account are required by the lender, buyers can expect to prepay up an estimated 14 months of insurance and several months of estimated property taxes.
The majority of the fixed closing costs for buyers are usually one-time charges from the lender and title company fees for document preparation and filing. Lenders often charge a fee for the buyer or borrower to obtain the loan – usually called a “loan origination fee.” This fee may vary from 0 to 2 percent of the loan amount, and it may be negotiable in some cases.
Typically, the other fixed closing costs are approximately $1,000 to $1,500 for your average Coastal Bend home. These expenses are comprised of miscellaneous expenses related to surveys, endorsements, credit reports, attorney fees, closing fees and other fees associated with preparing, processing and recording the new title documents. Again, please note that there is a wide amount of variation between lenders and title companies.
Just for an estimated example, an average buyer using an FHA loan (3.5 percent down payment, 30-year note, 4.5 percent interest) to purchase a $150,000 Corpus Christi home could expect to pay approximately $6,800 in prepaid and fixed closing costs (in addition to their down payment and inspection fees). However, keep in mind that many of these expenses are lender required or related, and cash buyers have a huge advantage at closing over the buyer utilizing a mortgage.
In the same scenario, a cash buyer purchasing a $150,000 home will still potentially pay earnest money, an option fee and for inspections, but the actual closing costs may be less than $1,000.