If you’ve never bought a home before, you may see a $300,000 asking price and think,“I can afford that” (with a mortgage, most likely).
But, can you really? Are you aware of the fees and expenses involved in purchasing a home?
Homeownership is a worthwhile investment. Each home is one of a kind and sits on something of extreme value—land. Despite the value and benefits of homeownership, it is important to be aware of all of the costs you’ll incur when purchasing a home.
The first expense you’ll incur when buying a home is earnest money. Earnest money is a deposit which you, as a home buyer, give to your Realtor or broker. It is then kept in escrow until the purchase is finalized, when it is put towards the down payment or closing costs.
If things fall through and you do not end up getting the house by no fault of yours, the earnest money will be returned to you. According to the Department of Housing and Urban Development, typical earnest money deposits range from $500 to $2,000. This is an up-front, out of pocket cost that you will have to come up with to prove to the seller that you are serious about buying the home.
The next major cost that comes with buying a home is the down payment. The down payment is a percentage of the cost of the home; which you pay at closing. VA loans for qualified veterans do not require any down payment, yet the vast majority of loans do.
FHA loans, which are most popular for first time homebuyers, require 3.5% down payment, as of June 2010. Conventional loans require 20% down payment, which can be a huge expense for any family. For example, if the house you want to buy is $300,000 and you do not qualify for a VA or FHA loan, you will have to bring $60,000 to the table at closing. You can use existing savings, a gift from family, the principal of a Roth IRA, or even up to $10,000 from a traditional IRA towards your down payment. But a down payment is just that: a down payment. Thus, it cannot be rolled into the monthly mortgage payment.
You will also have to pay real estate brokerage fees if you’ve used a broker or real estate agent. The typical broker’s fee is 3% of the sales price, though the custom varies from state to state. The brokerage fee is the commission that the firm, the broker and the real estate agents must split for the services rendered in showing you houses, drafting paperwork, submitting offers and coordinating the transaction.
Closing costs are the next major expense to plan for. They are used to pay for things like points, inspection fees, appraisal fees, title company fees, documentary transfer taxes, recording fees and many more important items. The Department of Housing and Urban Development states that closing costs typically run anywhere from 3 to 4% of the home’s price.
Luckily, you will know generally what to expect as far as closing costs ahead of time, as lenders are required to give you a good faith estimate, or an estimate of closing costs, within three days of filling out a loan application. And. it is possible to get some of these closing costs rolled into the loan for payments at a later date.
Points, for example, are an up-front expense, a pre-paid interest used to bring down the interest of the loan. One point is equal to 1% of the loan value. You may have to pay several points up-front. If you are trying to reduce your up-front costs, talk to your mortgage lender about what you can have rolled into the loan as far as closing costs. Every expense that you have to pay is listed on the HUD settlement statement, so be sure to review this important document and ask your real estate agent or lender if you have any questions.
Finally, don’t forget that the expenses don’t end when you get the keys in your hand. One of the major downsides to home ownership is that you’re now responsible for anything that could (and eventually will) go wrong. Even if your home inspection came up clean, a major appliance could break and stick you with a multi-thousand dollar repair bill.
The lesson? Even if you’ve saved cash for a huge down payment and all the other expenses associated with buying a home, the last place you want to be is in your new house with zero cash in the bank. Always plan to save a little extra so you have a new home expense fund after you move!
What about you? Did any of the expenses or closing costs associated with buying a home take you by surprise?