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Upfront Expenses:

Closing Costs & Prepaid Items Explained

Closing Costs

Closing costs are separate from the down payment and usually range typically between 2-5% of the sales price.

Earnest Money Deposit

This payment is made to at the time of contract to the settlement agent (a title settlement agent or attorney's office) and is held in escrow. It shows the seller how serious the buyer is about buying the property. Should the buyer back out of the deal and void the contract, this money is given to the seller.

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Assuming the buyer goes to closing and does not cancel the contract, both the option fee and earnest money deposits are credited to the buyer's bottom line, meaning it comes off the amount the buyer owes at closing as a credit.

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There is no set amount on what the earnest money amount should equal but we most commonly see it of the sales price. However, depending on the market, the borrower may offer a higher amount of earnest money to make their offer to stand out. This part of the transaction is more on the real estate side, so it's best to discuss it with a trusted realtor.

Option Fee

This deposit is paid by the buyer at the time of contract, directly to the seller depending on a number of factors. These costs are charged by lenders. The purpose of this deposit is to take the home off the market for a set number of days while the buyer does their due diligence and makes the decision of whether or not they will buy the home. If the buyer decides not to buy, the seller keeps the money.

Inspections & Appraisal

The appraisal is part of the buyer's closing costs; however, it is required that the buyer pays for the appraisal at the time of ordering it. This typically happens after the buyer is under contract on a home. Appraisal fees vary by market and loan type but usually range between $600-$900. The buyer has the option to obtain a home and/or pest inspection. Home inspections are not required by the lender on some loan types (estimated around $500-$600) but a pest inspection is required by the lender (estimated around $500).

If the home has a well, septic tank, pool, fireplace, or other amenities, there are additional specialty inspection options available as well. Sometimes a well or septic tank inspection is required for the loan. These are usually $500 or more.

Down Payment

Down Payment Minimum Requirements:
Primary Residences

  • FHA: 3.5% of the sales price

  • Conventional: 3% of the sales price

  • USDA: 0% of the sales price for eligible borrowers

  • VA: 0% of the sales price for eligible borrowers

Second & Vacation Homes

  • Conventional: 10% of the sales price

Investment Properties

  • Conventional: 15% of the sales price

Acceptable Sources of

Funds for Deposits & Closing

  • Checking and Saving accounts

  • Gifts from family

  • IRA, Stocks, Investment Accounts

  • 401(k) loans or withdrawals

  • Sale of personal assets, if documented properly

  • Secured borrowed funds (HELOC or Secured loan)

  • Upcoming payroll deposits before closing

Unacceptable Sources of Funds for Deposits & Closing

  • Cash - Any large, unusual deposits or cash deposits in the buyer's account in the last 60 days must be documented and explained

  • Unsecured funds like a title or personal loan

Prepaid Expenses

  • Property Taxes:

  • Homeowners Insurance:

  • PP Interest:

  • PP HOA dues:

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