After spending a couple of months looking for a home, you‘ve found the house of your dreams. The house suits your needs perfectly and you can envision spending the rest of your life happily living in that home. You go to your local bank, get approved for a mortgage loan and determine your down payment. You use your savings, maybe receive a gift or two to cover the remaining amount needed for your down payment (Home Buyers’s Guide to Saving for a Down Payment). Little do you know there are hidden costs of buying a home right around the corner.
You have your down payment, so you are all set to buy your home, right? Surprisingly, the answer is no.
It is a common misconception that your down payment is the only money that a buyer needs to come up with to buy a home. Most people do not realize when they are thinking of purchasing a home, that there are hidden costs of buying a home. These expenses are called upfront, or closing costs. Often home buyers find that they do not have enough to cover both the closing costs and the down payment amount they need to satisfy the terms of their mortgage.
So what are these hidden costs of buying a home and what can you expect to spend?
What is a down payment? Many people assume that a down payment is a set amount based on the percentage of the home’s selling price. Typically, the number most people think of would be about 20% of the home’s price. It is great if you could put 20% down on your home because it would save you from having to pay for private mortgage insurance, but if you do the math that number is not attainable for most home buyers. Fortunately, there are mortgage programs that allow home buyers to put down less of a down payment when buying their house. Here are a few examples of different mortgages and what they require for a down payment:
Federal Housing Authority loans are by far the most popular mortgage product for home buyers. This is mainly because the Federal Housing Authority mortgage loans allow a buyer to come up with a minimal 3.5% down payment.
Conventional loans are also a very popular mortgage product for home buyers. A Conventional Mortgage Loan typically requires the buyer to have a higher credit score than the FHA loans, but only require the buyer to come up with a 5% down payment.
Veterans Administration Loans are only available to veterans. These mortgage products are an excellent option for veterans because they provide 100% financing for the mortgage, which means they do not have to come up with a down payment.
First time home buyers
There is a USDA Loan program that requires no money down and offers competitive interest rates. Most towns on Cape Cape will meet the rural requirements of this first time home buyer loan, so be sure to ask the mortgage broker to see if this program is right for you. Often times, closing costs can be rolled into the mortgage on these loans.
Real Estate Taxes
Real estate taxes on the home are another expense to consider when buying a home. The majority of mortgage products require the home buyer to pay an entire year’s worth of real estate taxes for the home at closing. Therefore, this hidden costs of buying a home is determined by a couple of factors. The tax rate is determined by the town in which the property is located. For example, the tax rate is $4.99 per $1,000 of the property value for a house located in the town of Chatham. If you were to look at a home in the town of Harwich, which is the town next to Chatham, the tax rate is $8.97 per $1,000 of the property value. So if you find a home in the town of Chatham for $500,000, your real estate taxes due upon closing would be $2,495. If you find a house in Harwich for $500,000, your real estate taxes due upon closing would be $4,485. As you can see, it is important that you find out whether your mortgage product requires a year’s worth of real estate taxes at closing and determining what this comes to because that is a large amount of money to have to come up with at once if not anticipated. To get a better idea about the various tax rates take a look at MA residential town tax rates.
Any time that a home buyer plans to use a mortgage to buy their home, the bank that is lending the money will require an appraisal on the house to be conducted. The appraisal is an unbiased valuation of the house to determine that the buyer is paying a fair price for the home. This appraisal protects the buyer from paying too much for the home. It is also a protection for the bank lending the money because it tells them how much the house will sell for in a worst case scenario (for example if you default and the home is in foreclosure). It is not unusual for a home to be appraised for under what the buyer pays for the home, and it should not be taken as a sign of paying too much. Typically, a buyer could spend between $350-500 for an appraisal to be conducted. As a buyer, you should expect the appraisal process to take up to two weeks from start to finish. In past years it would take days, but since the recession federal guidelines changed, causing underwriters to spend more time gathering data and pictures of the home, delaying the appraisal process.
Homeowner’s Insurance is required to be purchased by the homeowner any time a mortgage is taken out on a home by a mortgage lender (or bank). The size and type of property will determine how much the homeowners insurance will cost. It is in the buyer’s best interest to shop around and get different quotes from insurance companies when purchasing homeowners insurance. Why is it so important to the bank for the buyer to purchase homeowners insurance? Well, it is not only important to the bank to have homeowners insurance in place, but it is also important to you as the homeowner. Homeowners insurance covers damage to your home and the loss of your belongings inside the home due to fire or natural disaster. Homeowners insurance (5 Things You Didn’t Know Your Insurance Covered) also protects the homeowner from an accident or incident that may happen to the home or on the property. For example, on a cold winter day when the walkway is covered on ice, someone may slip and hurt themselves on your property. This person could turn around and sue you for their injuries. Homeowners insurance would offset the costs of this unexpected and potentially costly accident. All policies are different, so it is important that you shop around, really inspect the policy to make sure that it is the right fit for your needs and budget. This hidden costs of buying a home protects you from potentially losing your investment due to an accident or natural disaster. Massachusetts has a Home Insurance Guide that explains different policies and where to look for coverage.
When purchasing your home, you may include contingencies to be included in your purchase offer. A contingency “means an offer on a home has been made and the seller has accepted it, but the finalized sale is contingent upon certain criteria that have to be met”. The most common contingency in a purchase agreement is that certain inspections come up with satisfactory results. Some of these inspections could include, but are not limited to: a home inspection, chimney inspection, radon tests, and pest inspections. If you see evidence of termite damage, you want to find out what you are in for if there is an infestation. All of these inspections are to be paid for by the buyer up front. The owner is not responsible for paying for these inspections because they were requested by the buyer and completely optional. The cost of the inspections will vary depending on what is being inspected. Some home inspectors charge a flat rate, others by the hour. When looking for an inspector, it is important to shop around to make sure that you get the best price and that the inspector is reputable. Ask your friends who they have used, and look for reviews online. At the end of the day, this hidden costs of buying a home gives you piece of mind that your investment in the home is a good one, and avoid costly problems in the future.
Real Estate Attorney
Some buyers choose to skip hiring a real estate attorney, or hire a lawyer who is not a real estate attorney to look over their purchase agreement to save a couple bucks. Maybe your uncle is a lawyer, and he offered to look over your paperwork for free. Can you do that? Absolutely. Is it a good idea? Not really. It’s one of the hidden costs of buying a home that should not be skipped. Having someone who is not specialized in real estate law is a huge mistake! Buying your home is more than likely the biggest purchase you will make in your life. It is important that you are comfortable with all of the terms and conditions in your purchase agreement before you sign it because it is a binding contract that holds you responsible for everything in it. Look for real estate lawyers in your area, check their rating on websites such as AVVO. Ask family and friends who they used when purchasing their home and whether they would recommend their lawyer. A real estate lawyer is there to make sure that the terms in your agreement are reasonable and negotiate any items of concern. Just like hiring a home inspector, hiring a real estate lawyer gives you piece of mind.
Buying a home (Guide to Buying a Home) is a big financial commitment, so you want to make sure you are prepared for this big undertaking. Make sure you shop around for these upfront costs so that you are comfortable with your choices and know how much to expect to spend once you are ready to close on your home. While some of these costs are unavoidable (such as the down payment, appraisal fee, homeowners insurance and taxes), the others should not be overlooked. Your home is a huge investment. Make sure that it is structurally sound, and that you’re signing a document that you’re comfortable with by hiring a lawyer to look it over. Ultimately the money that you spend on these hidden costs of buying a home are small compared to the price you are paying for your home. It’s a small price to pay for piece of mind and the ability to sleep well knowing you made an informed decision because all too often homebuyers find themselves in money pits trying to save a few bucks in upfront costs. In the long run, it is better to spend the money up front so that you know what you are getting into when buying your new home.