Earnest Money Deposit and Closing Costs: What First-Time Homebuyers Should Know

Buying your first home is an exciting milestone. Touring homes and choosing the right one is fun, but many buyers focus only on the purchase price and overlook some of the additional costs of buying a home.

Unexpected expenses - like the earnest money deposit - can catch first-time buyers off guard. Understanding these costs ahead of time helps you avoid surprises and enjoy a smoother closing process.

What Is an Earnest Money Deposit?

You've found the home you want to buy and you're ready to make an offer. When a seller accepts your offer, they typically take the home off the market while the transaction moves toward closing.

Because closing can take weeks, the seller wants assurance that you're serious. That's where the earnest money deposit comes in.

The earnest money is placed into an escrow account and held until one of three things happens: the home closes, the buyer or seller legally backs out, or the contract falls through.

If a buyer backs out without a valid contractual reason, the seller may keep the earnest money to cover lost time and opportunities. If the sale closes, the earnest money is typically applied toward your down payment or closing costs.

Understanding Closing Costs

Closing costs include a variety of fees required to finalize your mortgage and transfer ownership of the home. In most cases, buyers are responsible for the majority of these costs.

Working with an experienced mortgage professional can help you understand which fees are required and where savings may be possible.

Appraisal Fee

Your lender orders an appraisal to confirm the home's value supports the loan amount. Appraisal fees typically range from $300 to $1,000 and help determine the loan-to-value ratio.

Credit Report Fee

Lenders require a credit report to approve your loan. This fee is usually between $30 and $50 and may be partially or fully covered by the lender.

Inspection Fee

A home inspection protects the buyer by identifying potential issues that may not be visible during a walkthrough. Many lenders require an inspection to ensure the home is structurally sound.

If problems are discovered, you may be able to renegotiate the price or request repairs. The home inspection cost is typically around $500, depending on location and property size.

Loan Origination Fee

This fee compensates the lender for processing and underwriting your loan. It's usually around one percent of the loan amount. For example, a $300,000 mortgage would have a $3,000 origination fee.

Document Preparation Fee

Mortgage transactions involve extensive paperwork. Document preparation fees typically range from $50 to $100 and may be negotiable with strong credit.

Title Fees

Title fees ensure the property transfers legally and without liens. These may include title insurance, a title search, and recording fees, which vary by location.

Taxes

Lenders often collect several months of property taxes at closing. Buyers may also reimburse the seller for prepaid taxes and pay applicable transfer taxes.

Homeowners Association (HOA) Fees

If the home is part of an HOA, you may be responsible for dues that cover services like landscaping, snow removal, or exterior maintenance.