Buying a US home as a European: closing costs, title insurance and selling

Closing costs sit on top of the down payment

In the United States, the moment the purchase completes and ownership transfers is called closing. The costs paid at that point are closing costs, and they are separate from your down payment. The Consumer Financial Protection Bureau puts them typically at 2 to 5 per cent of the purchase price, not including the down payment.

What falls inside that range depends on the price, the loan type, the lender, the kind of home and above all the location. Typical items include lender fees, the appraisal, title insurance, recording and government charges, and the first contributions to an escrow account. Treat the 2 to 5 per cent as orientation, and budget it as its own cash requirement from the start rather than hoping it fits inside the down payment.

You do not have to guess the final figure for long. After you apply you receive a Loan Estimate, and the lender must give you a Closing Disclosure three business days before your scheduled closing. Compare the two line by line, and ask about anything that has changed.

Why a lender insists on title insurance

Title insurance exists because someone could later claim a right to the home that dates from before you bought it, for example an unpaid tax bill or a contractor's lien left by a previous owner. There are two kinds of policy.

A lender's policy protects the amount the lender has lent. Most lenders require you to buy one. An owner's policy protects you, the buyer, and is optional. Whether to take it is your decision, but it is worth understanding what it covers before you decline it, especially as a newcomer who does not know the local property history. Buying both policies from the same provider is generally cheaper than buying them separately.

Escrow, property tax and insurance

Many US homeowners do not pay property tax and homeowners insurance as separate annual bills. Instead the mortgage servicer collects a share with each monthly payment into an escrow account, sometimes called an impound account, and pays the bills when they fall due. Many lenders require this arrangement so they know the bills get paid.

For budgeting, the key point is that your monthly payment is not fixed even on a fixed-rate loan. When property tax or insurance premiums change, the escrow amount and therefore your total payment change with them.

Property tax deserves special attention because it is set locally. Rates differ widely between states and even between neighbouring counties, so two homes at the same price in different places can carry very different yearly costs. Check the tax history of the specific property and get insurance quotes before you commit, not after.

What happens when you sell as a foreign person

Many people plan to stay for good. Others expect to move on or return to Europe one day, and for them the rules on selling matter from the beginning.

Under FIRPTA, when a foreign person sells US real property, the buyer is generally required to withhold 15 per cent of the amount realised on the sale and pay it to the IRS. There are exceptions for homes the buyer will live in: no withholding where the amount realised is 300,000 dollars or less, and reduced withholding between 300,000 dollars and 1 million dollars, provided the buyer meets the conditions for using it as a residence.

Whether you still count as a foreign person when you sell, and how any withholding relates to the tax you actually owe, depends on your circumstances at the time. That is a question for a cross-border tax adviser, and it is worth asking before you buy so that your plans for the property fit your plans for your life.

Who does what at a US purchase

Expect more participants than in many European purchases. A real estate agent represents you in the search and negotiation. The lender handles the loan and orders an appraisal. A title company searches the property's history and issues the title insurance. An escrow or closing agent holds funds and documents and coordinates the closing, and the exact arrangements vary from state to state.

Many buyers also commission a home inspection, which is separate from the lender's appraisal and looks at the condition of the house rather than its value. For someone new to US construction and climate, an inspection is a sensible step to discuss with your agent.

Questions about the US buying process

Continue your research

• Getting a US mortgage after moving from Europe
• Funding a US home with European savings or home equity
• Start a personal US mortgage scan