HOME PURCHASE GUIDE
So...you've found your dream home on Zillow or another search engine. When are you ready to connect with an agent, view homes and make offers?
Most sellers require Proof of Funds letter from your banker or a bank statement for a cash sale or Loan Prequalification from a mortgage company.
Get this taken care of before you call an agent. The market is currently moving fast and some homes go under contract in a day. You don't want to be disappointed that you lost an opportunity while waiting on your bank or mortgage company.
Also, you will have a better idea of your budget and what to look at.
Buying a home is a significant achievement that can be financially rewarding. You may have an understanding of what a down payment and closing costs are, but there are additional costs that you need to consider
If you are thinking of buying a home in Arizona, you need to know the all of the costs associated with buying and owning. This includes the costs that you will be subject to
before you buy your home (while it is under contract),
when you buy your house (at the closing appointment),
and after you buy your house.
Costs Incurred BEFORE You Buy the Home
Once you have an accepted purchase contract, there are various services that you may have to pay. These include the following:
ERNEST MONEY DEPOSIT : When your purchase offer is initially accepted by the seller, you will typically make an earnest money deposit to show your good faith intent to purchase the home. In Arizona, the earnest money deposit is typically held by an agreed upon escrow company. This money is held during the contract period and is applied towards (not in addition to) the total required cash to close when the purchase is completed. Be advised that if the home doesn’t close and the contract is cancelled, you could possibly lose your earnest money deposit. The amount of the earnest money deposit is dependent upon different factors involved in the home purchase. However, it is not out of the ordinary to see them be between $1000 and $2000.
HOME INSPECTION : It is advised – but not required – that you obtain a home inspection before you buy the home. In Arizona, you typically have a 10-day period when the contract is first accepted to complete the inspection and other standard inquiries related to the suitability of the home. A home inspection gives you detailed information about the overall condition of the home. A qualified inspector will do a thorough examination of the home to make sure that it is not hiding any structural, mechanical (ex. air conditioning unit) or other issues. The inspector will identify any items that need to be repaired or replaced. Note that an inspection is not an appraisal; it doesn’t give you an opinion of value. The cost of the inspection depends on the type, size and location of the home. It is not out of the ordinary for a home inspection in Arizona to cost between $200 and $600.
TERMITE INSPECTION: As the name indicates, a termite inspection is a visual inspection of the home for evidence of wood-destroying insects. It is usually paid for by the seller of the home. However, the Arizona the purchase contract states that if the lender requires a termite inspection, it will be paid for by you, the buyer. A basic termite inspection will probably cost around $100.
SURVEY: Like a home inspection, a survey is not required. If you aren’t sure if you should have a survey done, you should seek the advice of your real estate agent. When you complete the purchase contract, you will specify if the survey will be paid for by you and/or the seller. A survey is an assessment of property lines to determine the exact amount of land that is part of the property. The survey will show any easements or encroachments on a property. A survey could cost around $600.
Appraisal: When you are obtaining a mortgage, you will be required to obtain an appraisal. The appraisal is an independent opinion of value. It will document the reasons the various things that impact the value of the home such as the condition of the home, any unique features, the neighborhood and recent comparable sales. Most lenders will allow you to pay for your appraisal with a credit card and many will allow you to pay it at closing. An appraisal usually costs between $400 and $500.
CREDIT REPORT: A credit report is a detailed report of your credit history as reported by the three major credit bureaus. You may not be required to pay for the credit report upfront. If you are, the lender typically allows you to pay for it with a credit card and many will allow you to pay it at closing. It usually costs between $10 and $20.
Costs to Buy a Home Paid at Closing
DOWN PAYMENT: Your down payment is not a cost. It reduces your loan amount and if your purchase price is less than or equal to the appraised value, it becomes equity in your home. But, it is a significant cash outflow and the #1 barrier to buying a home. The minimum required down payment depends on your loan type. It can typically range from 0% (VA and USDA) to 5% (conventional).
Origination Charges: Origination charges are fees that are charged by the lender (the originator). They vary from company to company and can be structured in many different ways. For example, some companies charge lower fees and higher rates. Others will advertise low rates, but charge high fees. It is difficult to know if you’re getting a good competitive deal. If you want to be able to compare your rate and fees quoted from company to company, the best way to do so is by comparing the annual percentage rate (APR). The APR allows you to compare apples to apples. No matter how a company structures their rates and fees, it all blends together in the APR. The APR is a way of expressing the costs as a rate. When comparing quotes for the same loan type between two companies, the lower APR is the better deal.
Here is a list of typical origination charges. This list is not all inclusive.
Origination Fee: The origination fee is a charge by the lender to help cover expenses related to the origination, processing and funding your loan. It is considered to be similar to discount points. It is not mandatory to pay an origination fee. Some lenders charge it and others don’t. You may be able to deduct an origination fee paid against your taxes. Check with your CPA or tax advisor. It typically ranges up to 1% of the loan amount.
Discount Points: Discount points lower your interest rate in exchange for an upfront fee. As such, they are essentially prepaid interest. They are not mandatory but can be advantageous if you plan on having the mortgage for a long time (general rule of thumb: 5+ years). Discount points can also be tax deductible. Again, check with your CPA or tax advisor. Discount points are calculated as a percentage of the loan amount.
Processing Fee: This is the fee charged by the lender for the clerical and support duties necessary to analyze and verify the information that you provide to support your loan application such as your employment, income and assets. This fee varies from lender to lender but is typically around $500.
Underwriting Fee: This fee is charged by lenders to cover the cost to analyze the risk of performance of the loan. In other words, someone reviews your information in detail to obtain a satisfactory level of comfort that you will be able to make your payments. This fee varies from lender to lender and can range between $400 to $900.
Admin Fee and Application Fee: These fees help cover the lender’s general costs. They aren’t charged by all lenders.
Third Party Fees for Services You Cannot Shop For: These are fees that are required to process your loan application. As the name indicates, they are charged by third-party vendors that the lender uses. Appraisal fees and credit report fees fall into this category for disclosure purposes.
Here is a list of typical costs in this category:
Flood Certification Fee: This is a fee that must be paid for an assessment to see if the home that you are buying falls into a flood zone. Yes, we do have flood zones in Arizona. This fee is usually around $20.
Government Funding Fees: If you are getting a VA loan, you will typically have to pay a VA funding fee. If you are getting a USDA loan, you will typically be charged a guarantee fee. These fees help limit exposure to tax payers. The amount of the fees depends on different factors and they are typically financed into the loan.
FHA Upfront Mortgage Insurance Premium: If you are obtaining an FHA loan, you will be required to pay mortgage insurance. This insurance protects against losses caused by default or foreclosure. If it didn’t exist, FHA rates and down payment requirements would probably be higher. FHA requires that you pay a mortgage insurance premium at the time of closing. This amount is currently 1.75% of the base loan amount. It is typically financed into the loan.
Tax Service Fee: This fee is sometimes charged if the lender uses another company to monitor the payments of your tax bills. It is usually around $75.
The most common costs that are in this category are your various title fees.
Settlement “Closing” Fee: This is the fee charged by the title company to handle your closing appointment where you will sign all of the documents necessary to buy your home. It can vary from company to company, but is usually around $400.
Lenders Title Insurance Policy and Endorsements: This insurance covers you and lender against any losses incurred because of various errors or issues that are related to the evidence of ownership and possession of the property. In Arizona, the title company and escrow company are usually one and the same. Remember that the title company is selected and agreed upon as part of your purchase contract. The title policy fee varies based on different factors but typically runs between $600 and $1000.
Miscellaneous Title-Related Fees: Depending on the title company, you may be charged a handful of miscellaneous fees such as courier fees, e-Doc fees, printing fees or fax fees. These fees usually don’t add up to be more than $100 to $150.
Attorney Fees: Some states use attorneys to prepare and review the loan documents. It is not a common practice in Arizona. So, attorney fees are not common in Arizona.
Recording Fees: When you buy a home, certain documents (ex. Deed of Trust) related to the transaction are public records and are required to be recorded with the county in which the home is located. The County Recorder office will charge recording fees for this service. The total of these fees usually cost between $75 to $150.
Prepaid Costs: Prepaid costs or “Prepaids” are expenses associated with owning your home that you are required to pay in advance at the time of closing.
Homeowner’s Insurance: When you buy your home, you are usually required to pay the annual cost of the homeowner’s insurance (also known as hazard insurance) policy. Homeowner’s insurance covers damage to your property and your liability or legal responsibility for any injuries and property damage you or members of your family cause to other people. In Arizona, an annual policy usually runs between $500 and $800.
Property Taxes: As a home owner, you will pay property taxes on your home. In Arizona, it is usually paid through the county assessor where the property is located. Property taxes are collected twice a year (October and March) and, depending on what month you buy your home, you will be required to prepay your property taxes up to the coming due date. So, you will typically prepay between 2 and 6 months of taxes when you close on your home.
Prepaid Interest: Interest on a mortgage is paid in arrears. What that means is that during a month the interest on the loan will accumulate and then you are required to pay it at the beginning of the following month. So, for example, when you make your February 1st payment, you are paying the interest that accrued in January. When you close your home, this causes you to have to prepay the interest up to the end of the current month. So, using the same example, if you close on December 21st you will prepay 10 days of interest up to the end of the month. You won’t have a payment due on January 1st but interest will start to accrue at that time and you will pay it with your first payment on February 1st. For this reason, if you want to keep the amount of your cash to close as low as possible, you should set your purchase date (referred to as the Close of Escrow date) as close to the end of the month as possible.
Mortgage Insurance: Depending on your loan type and scenario, you may have to pay monthly mortgage insurance on your loan. Again, depending on your scenario, you may have to prepay a month or two of mortgage insurance.
Homeowner Association (HOA) Dues: Many homes in Arizona are located in communities that have homeowner associations. If that is the case, you may be required to prepay your HOA dues.
Reserves: Lenders require that an escrow account is maintained on your behalf to pay for your tax and insurance on most loans. Your monthly tax and insurance payments are deposited into your escrow account. In addition to the monthly payments collected (1/12th of the total of disbursements payable during the year), you will be required to deposit reserves into the account at the time of closing in order to create a cushion for any overages that might arise when the tax and insurance bills become due. A federal law called RESPA sets limits on the amount of reserves that a lender can require that you have in the account. Based on this law, the lender will typically require two months of reserves over and above the amount that was prepaid (discussed above). Also, the lender must do an analysis of your escrow account once a year and notify you of any shortages (ex. taxes increased and were more than what was collected) or return any reserves in excess of $50.
HOA Transfer Fees: If the home that you are buying is in a community that is part of a HOA, then it is likely that there will be a HOA transfer fee that will need to be paid. This fee covers the expenses that result from the ownership change. The HOA transfer fee will help cover costs associated with the creation of new documentation and paperwork involved in setting up a new homeowner. When you complete the purchase contract, you will specify if the HOA transfer fees will be paid for by you and/or the seller.
Past due HOA Fees: It may be a complete surprise to many first time home buyers in Arizona that if they are trying to buy home that is being sold as a short sale that they may wind up paying the sellers past due HOA fees. You need to specify in the contract if the past due amount will be paid by you and/or the seller.
Home Warranty: A home warranty is a plan that can be purchased when you buy the home that covers the cost of repairs and replacement for certain appliances and systems in the home. You will need to specify in the purchase contract if the cost of the home warranty will be paid for by you and/or the seller. It is highly recommended that you obtain a home warranty. They typically cover your air conditioning and heating systems, your kitchen appliances, your electrical and plumbing systems and your garage door opener. They usually cost about $500 a year.