What’s an Earnest Money Deposit? (And Other Costs of Home Buying)

Buying your first home is an exciting experience. You get to look at houses and choose the one that’s just right for you. If you've been planning to buy a home for a while, it's likely that you've done your research and know how to identify the upfront costs of buying a home. However, there are some costs you may not be aware of, such as the earnest money deposit. 

You don’t want these unexpected costs to surprise you and dampen your enthusiasm. Understanding the earnest money deposit and other costs of home buying can help you have a positive experience. Below, we talk about the closing process and the fees you may be responsible for. 

What Is an Earnest Money Deposit?

You’ve found the home of your dreams. What now? Well, you make an offer to buy the home from the seller. When accepting the offer, the seller takes the home off the market, and it’s no longer shown to other interested buyers.

It’ll take weeks or months for the home to close. If you decide not to buy the home, the seller loses time and the opportunity to sell to other prospective buyers. 

For this reason, typically, you must offer an earnest money deposit. When you make the offer, the money you provide as earnest money goes into an escrow account. It stays in this account until the house closes, one of the participants backs out of the deal, or the agreement between the seller and buyer falls through. 

If you back out of buying the home without a good reason, the earnest money goes to the seller to cover their time and lost opportunities. 

However, if the sale proceeds, the earnest money deposit goes towards your down payment or closing costs. 

Closing Costs

The term closing costs is a broad term that covers a variety of fees. You’ll probably end up paying most, if not all of them. When you work with experienced loan professionals, they understand all the ins and outs of the closing process. They can provide guidance as well as help cut down on some of the costs. Here are the most common:

Appraisal Fee

Your lender needs to know that the home you want to buy is worth the money you're approved to borrow. This means an appraiser needs to determine the value of the property. Expect to pay between $300 to $1,000 for the appraisal. All things considered, this is essential for the lender to determine the loan-to-value ratio.

Credit Report Fee

A credit report is a must to qualify for a loan. In some cases, the lender covers a portion of the credit report fee. This may be between $30 to $50. Others may require you to cover the full cost.

Inspection Fee

A home inspection is really for your benefit. Many lenders ask for an inspection to ensure that the home is structurally sound. In some cases, the inspection may turn up issues that aren’t obvious during a walk-through of the house. 

In cases like this, you may be able to renegotiate the price or terms of the home sale. Depending on where you live, expect to pay around $500 for an inspection.

Loan Origination Fee

Your lender will do a majority of the work to help you secure your loan, and they take a small fee for the work. Most lenders charge about one percent of the total amount you will borrow. For example, if the mortgage is $300,000, you’ll pay $3,000 for the loan origination fee. 

Document Preparation Fee

Much paperwork goes into buying a home, and your lender must take the time to complete them. For this reason, you may see a document preparation fee in your bill. It’s usually around $50 to $100. If you have good credit and a variety of lenders vying for your business, you may be able to negotiate on the amount.

Title Fees

The title of the home needs to transfer from the seller to the buyer. The lender, however, will put a lien on the home. The title fees may include title insurance, title search fee - this ensures a clean title - and a recording fee. These costs can vary by location.

Taxes

At the time of the closing, many lenders want you to pay two months’ worth of state and local property taxes. The exact amount you pay is based on the value of the property and its location. Since most property tax is paid in advance, you may need to repay the seller for any taxes that they have already paid. Another tax you may have to pay is a transfer tax.

Homeowners Association (HOA) Fees

Some homes, especially condos and townhouses, are governed by an HOA that takes care of landscaping, snow plowing, or mowing. You pay HOA fees to cover these services.