UPFRONT FEES VERSUS MONEY NEEDED AT CLOSING WHEN BUYING A HOUSE
Once you find a home and a contract is negotiated with the seller, there will be some expenses which you will need to pay upfront (i.e., prior to closing). These typically include:
TERMINATION OPTION FEE
What is it? The termination option fee is a fee paid by the buyer directly to the seller for the unrestricted right to terminate the contract within a certain number of days that’s agreed to in writing by both parties. The TREC One To Four Family Contract allows the buyer to request a termination option from the seller in Paragraph 23 but the seller is not obligated to provide this to the buyer. In order for an option period to be valid, some consideration (money) must be given to the seller, but this amount can be as low as one dollar. The termination option essentially gives the buyer a protection period to terminate the contract in case they decide not to buy the house for any reason for a specific number of days agreed to in the contract between the buyer and seller.
How Much Is An Option Fee? Option fees vary depending on what the buyer and seller agree to in writing. I cannot say a specific amount is “customary” or “common”, but option fees are typically a reasonable amount that won’t put a buyer in a bind.
When Must This Money Be Paid? The TREC One To Four Family Contract requires the option fee to be paid to the seller within two days of the execution of a contract. The money can be paid via check or money order. The seller typically will cash the check immediately.
Does The Buyer Get The Option Fee Back? Paragraph 23 of the One To Four Family Residential Contract determines whether the option fee will be credited to the sales price or not. If the buyer chooses to use their unrestricted right to terminate the contract, the seller keeps the earnest money.
What is it? Earnest money is essentially “good faith” money that’s paid by the buyer to the title company to be held in escrow until closing. Upon closing, the earnest money is credited towards the buyer’s total move-in costs. Earnest money is typically paid as a way of letting the seller know the buyer is serious about making an offer.
How Much Is Earnest Money? Earnest money varies and is whatever the seller and the buyer agree to in writing. Buyers may have a better chance of securing a contract with the seller by making a strong offer of earnest money.
When Must Earnest Money Be Paid? Section 5 of the TREC One To Four Family Contract states that the buyer must pay earnest money upon execution of the contract. The funds can typically be paid with a personal check but some seller’s may require a separate amendment that says the money must be paid via cashiers check. The check is typically cashed immediately.
Does The Buyer Get The Earnest Money Back? Upon closing, the earnest money is credited towards the buyer’s total move-in costs (down payment and closing costs). If the contract is terminated by either party, Paragraph 18C of the One To Four Family Contract determines what happens to the earnest money. If either party defaults on the contract, Section 15 of the One To Four Family Real Estate Contract determines what happens to the earnest money. In some cases, such as in the purchase of a new home or a foreclosure, the seller may require a separate contract that will determine what happens to the earnest money if the buyer defaults.
What Is It? Although a home inspection is not required, I highly recommend that every buyer hire a TREC licensed home inspector to perform a home inspection of the property. The cost for home inspections vary from one inspector to the next. Make sure to use an inspector that is licensed by the Texas Real Estate Commission.
When Must The Inspection Fee Be Paid? The home inspection is typically done within the first few days after execution of a contract within the option period. Performing the inspection during the option period insures the buyer will be able to exercise their unrestricted right to terminate the contract in case a problem with the home is discovered by the inspector and the seller is unwilling to correct the problem. The inspector will typically require their fee to be paid at the time of the inspection. Most inspectors will take checks and many will also take credit/debit cards.
What Is It? An appraisal is typically required by the lender to determine a professional opinion of the market value of a property. The appraiser may also make sure the property meets the lender’s minimum standards. FHA, VA and Fannie Mae/Freddie Mac all have minimum property standards, although Fannie Mae and Freddie Mac may not require a full inspection of the property with a large down payment and good credit score from the buyer.
When Must The Appraisal Fee Be Paid? Most lenders require full payment of the appraisal prior to it being ordered. Lenders will typically not order the appraisal until the home inspection has been performed and the option period has expired to avoid wasting money in case the buyer decides to terminate the contract within the option period.
How Much Do Appraisals Cost? Generally they cost a few hundred dollars but can be more for larger homes. Also, the appraiser may charge an additional fee to re-inspect the property if they find something that must be corrected/repaired with the property prior to closing. The cost of the appraisal will appear on a lender’s Initial Fees Worksheet as well as the Good Faith Estimate.
BUYING A NEW HOME – In some cases, a home builder may require a buyer to pay additional money on top of what they require for earnest money for payment of options and upgrades in addition to the standard features the builder offers with a home.
WHAT ABOUT MORTGAGE APPLICATION FEES?
Most reputible lenders will NOT charge a fee for pre-approval, other than maybe their cost to pull a credit report, which should not exceed $20.
In some cases, the home inspector and/or appraiser may uncover problems with the home that require a specialist to determine what, if any, additional repairs need to be performed. For example, if a home inspector or appraiser notes a crack in the foundation, they may recommend a structural engineer to inspect the property. The cost of this additional inspection by the engineer will then be negotiated between the buyer and the seller as the contract does not specifically determine who must pay them.
Every situation is different. Please call or email me to discuss your situation and I should be able to give you a reasonable estimate of how much to expect for these upfront fees and an explanation of how the contract works in plain English.