Lease agreement: typical upfront costs of leasing a home
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In some markets, the upfront costs of leasing a home are eye-watering high. In fact, a lease agreement can require upfront costs that would exceed a down payment and closing costs.
Expect to have to pay all or some of the following:
- Application fee
- Move-in fee, usually the first month’s rent and sometimes the last month’s rent
- Security deposit
- Pet deposit, if you have or plan to keep a pet in the home
Those exclude the costs of physically moving. They can range from a couple of six-packs for friends who help you schlep your belongings to thousands of dollars for a full-service household moving company.Verify your new rate (Oct 30th, 2020)
Those upfront costs of leasing a home
Let’s look at those costs in more detail:
1. Application fee
This is intended to cover the expenses a landlord incurs when verifying your identity, credentials and claims you made on your application form. That verification process may include:
- Pulling your credit report and credit score
- Undertaking a background check, including against criminal records
- Following up references from previous landlords
- Confirming your employment history and your residence at previous addresses you’ve provided
Not all landlords undertake all those checks. Some do none at all. However, the pricier the home you want to rent, the more likely it is you’ll be thoroughly vetted.
There may also be a correlation between checks and types of landlord. Big corporate landlords and rental agencies tend to be more careful and have stricter rules than some small landlords.
2. Move-in fee
You’ll be very lucky indeed to find a landlord who doesn’t insist on a month’s rent in advance when you sign your lease. However, you may also be asked to pay a second month’s rent at the same time. That protects your landlord in the event you move on without giving proper notice.
This is often called the “last month’s rent,” because paying it now means you won’t have to pay rent for the last month before you move out. If your monthly rent has risen by the time you quit the home, you shouldn’t usually have to pay the difference between what you paid and what would otherwise be due for that month.
Partly for that reason, some canny landlords have stopped labeling this additional month’s rent as “last month’s rent.” Unless your lease explicitly describes it as covering the last month of your tenancy, you’ll have to continue to pay rent at the applicable rate right up until your last day. You should then get a check from your landlord refunding the money.
Paying an additional month’s rent is more common in local markets where demand for rental homes exceeds supply. If you’re lucky enough to be in a market where there’s a glut of homes, you’ll probably find landlords more willing to compromise across a range of issues.
3. Security deposit
Laws governing security deposits vary from state to state, which makes generalizations difficult. Legal website NOLO has a page listing every state and you can click through for an overview of the law that applies to your tenancy.
Those variations are considerable. For example, Alabama caps security deposits at one month’s rent while Alaska caps them at two, though the latter has a $4,000 overall limit. Either way, you could be looking at a lot of money.
You can limit your landlord’s ability to keep some or all of your security deposit by carefully documenting (including with still photographs and videos) the state of the home when you move in. Then document it similarly when you move out. Of course, it’s a good idea for you to clean the home and make repairs for any damage you’ve caused before you move out.
It can also help if you and the landlord spend time inspecting the home together at each end of your tenancy. You should compile and agree a written list of defects and damage on each occasion. Your landlord can retain money for excessive damage caused by you, but not for normal wear and tear.
4. Pet deposit/pet fee
Landlords have a right to impose an absolute ban on pets. The only exception to that is provided under federal law and covers legitimate service or companion animals. Landlords cannot ban nor charge an extra deposit or rent for a service animal.
Obviously, you only have to pay a pet deposit (or pet fee) if you have a pet. If you acquire one during your tenancy, you should normally tell your landlord and pay the pet deposit/fee then. A pet deposit is refundable when you leave, subject to deductions for damage, while a pet fee is regarded as additional rent and is kept by the landlord.
In most states, your security and pet deposit added together cannot exceed the cap on security deposits. In other words, if your state limits security deposits to one month’s rent, your security deposit plus your pet deposit cannot exceed one month’s rent. However, there are states where that’s not the case, notably Delaware and North Dakota. So use that NOLO webpage to find the rules that apply to you.
Can the upfront costs of leasing a home really exceed the costs of buying one?
Could that be true? Might the upfront costs of leasing sometimes be higher than those for buying? You bet!
Obviously, that will depend on a number of factors. Most important of those are:
- The type of mortgage you’ve chosen (or that’s chosen you)
- Conditions in your local sales and rental markets
- Whether you’re eligible for down payment assistance
Indeed, it’s perfectly possible for some lucky people to buy a home without paying a cent in upfront costs. Literally.
Some cost comparisons
The U.S. Census reckons the average rental for all American homes was $910 in the last quarter of 2017. Remember, that’s a nationwide average: A different study recently found average rents in San Francisco, California, were $3,600 for a one-bedroom apartment!
Still, let’s take the nationwide average. With a modest application fee, one month’s rent in advance and a security deposit equal to a months rent that’s close to $1,900. If the landlord requires the last month’s rent, too, you won’t be far short of $3,000. (If you want to rent in San Francisco, you could be staring at roughly $11,000.)
No- and low-down-payment mortgages
However, if you want to buy in a rural or suburban location that’s designated by the United States Department of Agriculture (USDA) as eligible for its mortgage program, you may not have to make a down payment at all. And those designated areas add up to 97 percent of the landmass of the United States.
Closing costs can still be a big hurdle for home buyers who can’t get VA loans. These vary hugely from state to state. You could pay on average more than $11,000 in Washington DC but under $1,700 in Missouri.
But you may not be on your own. Thousands of programs across the nation can help with all or part of your down payment through grants and loans, subject to eligibility. And those down payment assistance programs could bridge much of the gap between the costs of leasing a home and those of buying one.
There are times when renting is the right choice. And you may have sound reasons why you don’t want to buy now. But don’t be put off by costs, at least until you’ve explored all your options.
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