So if you’re thinking of buying your first house, be on the alert for these not so hidden costs, just maybe forgotten costs. It’s worth noting that these are routine and legal and lenders aren’t allowed to impose hidden costs.
Three major upfront expenses are the earnest money deposit, the down payment and closing costs.
Earnest money deposit (EMD)
Although not required, you need to be prepared with cash for a deposit to attach to your purchase offer. The amount of the deposit varies. EMD deposits can range from a flat fee of $500 to 1 percent or even up to 5 percent of the purchase price.
The purpose is to prove to the seller that you are sincere about buying the property. This is especially important in a competitive situation, when others may be negotiating to buy the same home.
In general, most people need at least 3.5 percent of the purchase price as a down payment on a Federal Housing Administration (FHA) loan. Veterans Affairs (VA) loans are available to veterans and active-duty military families and have no down payment requirements. For conventional loans, a minimum down payment of 5 percent is acceptable for borrowers with excellent credit, and some borrowers need to pay as much as 20 percent of the purchase price as a down payment. You will also have to pay private mortgage insurance (PMI).
In the past, lenders expected buyers to make a down payment of at least 20 percent of the purchase price. Today, buyers can pay as little as zero to 5 percent down provided they purchase private mortgage insurance (PMI), which helps protect the lender in case the borrower fails to repay the loan. A 5 percent down payment on that $150,000 home comes to $7,500. However, PMI might add another $100 to the monthly payment or about 0.5% to your mortgage payments for the year.
When you apply for your loan, your lender must give you a good faith estimate of these costs. They are associated with processing paperwork and may include title searches, attorney fees, survey fees, and deed-filing costs. Closing costs generally range between 2% and 7% of the property value, adding thousands of dollars to the cost of buying your home. Many of the lender’s fees are negotiable and may even be waived. These fees include application fees, document preparation fees, and loan processing fees. You also can work with the home seller to structure your purchase so that the seller will pay for some or all of the closing costs.
Other costs to consider
You should perform a home inspection, which can run several hundred dollars. Every buyer needs to have a home inspection performed and that usually is done within 10 to 15 days after the contract is ratified. This is done before closing and can be a contingency in your contract to protect yourself (see Contingencies to consider to protect yourself and your EMD below). Even if the lender does not require an inspection, it’s worth paying a professional to evaluate the house so that you can avoid spending hundreds of thousands of dollars on repairs that you were not aware of.
The seller might pay for inspections in some cases, but it’s more common for the buyer to foot the bill. A typical home inspection will cost between $300 and $500 and usually covers things like the condition of the roof, the quality of the foundation, and whether the circuit breaker and electrical system are up to code.
Buyers sometime pay for the appraisal and sometimes the fee is included in the closing costs paid on settlement day.
Your lender may want you to have a professional survey of the property so that everyone will know exactly where the land boundaries are. That’s another several hundred dollars.
You know you have to now start paying real property taxes on your new home, but some people forget or do not realize that they will most likely need to prepay those taxes at closing.
Principal, Interest, Taxes & Insurance or PITI
Also consider using (Principal, Interest, Taxes & Insurance) PITI on your new home loan. If taxes and insurance are not held in escrow each month, then the homeowner pays these bills when they are due.
Each mortgage payment includes both the repayment of a portion of the principal and the interest or also known as “P&I.”. The amount of your monthly payment will depend on the amount, your interest rate, the repayment period, and your loan type, such as a fixed or adjustable-rate mortgage.
In many cases, a homebuyer’s monthly mortgage payments include not only the amount required to repay a portion of the principal and accrued interest (P&I) but also property taxes, homeowner’s insurance, and private mortgage insurance. The lender holds these additional amounts in a separate “escrow” account and then pays the tax and insurance bills. This ensures that these annual expenses get paid and paid on time.
Homeowners insurance is required because you are a liability to your lender should your house go up in flames and the property becomes worthless. The cost of insurance varies widely and depends largely on where you live and the value of your home. There are also added costs if you live in an area prone to flooding, hurricanes, or other natural disasters.
Some lenders will require you to have at least two house payments, including P&I in the bank after closing.
Also, take into consideration moving costs and how much it might take to fix up your new home and maintain it. Things such as paint, new flooring, appliances, lawnmower, and furniture can add up quickly.
Way to save $
Lenders will collect interest for the current month at closing and if you are able to set your closing date for as late in the month as possible the amount will lower. If you close at the beginning of the month that will mean that you will pay for an entire month of interest, but closing at the very end means that you will only pay a small fraction of a month’s worth of interest.
- Negotiate the price of the home.
- Negotiate who pays the closing costs.
- Shop around for lenders and find the best interest rate and lowest fees plus make sure to review your good faith estimate before making any commitments.
Contingencies to consider to protect yourself and your EMD
Once you reach a mutually acceptable price and an estimated closing date usually 45 to 60 days from acceptance of the offer, it’s good to consider the following contingencies:
- You being able to obtain a mortgage.
- A home inspection does not show any significant defects.
- A must in the contract should be a guarantee that you may conduct a final walk-through inspection 24 hours before closing. This clause allows you to check the home after the sellers have moved out so that you have time to negotiate payment for repairs that might have been missed, not fixed, or caused by the seller’s movers.