Ask anyone who has bought a house, and they’ll pretty much universally agree that buying a house is more expensive than it seems on the surface. And that there are places where you didn’t anticipate needing to spend money until you get to them. I still remember buying our first house and then realizing that we’d need to figure out how to pay for window coverings for all five windows and one sliding glass door. We were those neighbors with sheets on our windows for a long time.
Even if you have a no money down loan, you’ll still need to spend some money. And if you’re not paying it up-front, your lender is rolling these costs into the back-end of the loan, meaning you’ll be paying those costs, plus interest, over the next 30 years.
There are several phases to home buying, and they all have expenses that you might not expect.
Just to put down an offer, you will need an earnest money deposit. This is true even if you are using a loan program that does not require a down payment, such as a VA loan. The size of the earnest money deposit will depend on your market and individual situation.
In many cases, this might just be a check that will, in theory, never be cashed. However, you don’t want to even write that check unless you know that it would clear.
Between the offer and closing, you will need money for an appraisal and inspections. At the very least, you will want a general home inspection. I actually suggest two, because the variation between inspectors is huge. Then, you’ll need anything special inspected separately: chimney, certain HVAC systems, and anything suggested by the general home inspector. My last home purchase included two home inspectors, chimney, HVAC, plumber, and a structural engineer. It was expensive, but absolutely worth it. Buyers who skimp on inspections are taking a huge risk with the largest purchase of their lives.
At closing, you will have to pay for interest from the date of closing until the first mortgage payment, plus you will have to reimburse the seller for any costs that they’ve pre-paid. This almost always includes real estate taxes and might include some utility payments. Plus, you’ll pre-pay the first year’s homeowner’s insurance at the closing. Other surprise costs might include homeowners association dues (especially if they are paid annually – you’ll either have to reimburse the seller, or make a large payment to the homeowner’s association.
Depending on your loan type, these costs may be rolled into the loan. While that’s great for your current cash flow, it means you’ll be paying for those expenses over the entire term of the loan, and that’s not great. You really want to minimize the amount that you finance.
Once you’ve got the house, all these expenses need to be addressed relatively immediately:
- any appliances that don’t come with
- window coverings
- carpets, if it has solid flooring
- lawn care tools, and an outbuilding to store them if the house doesn’t have storage
- pest control policies, if necessary in your area
No matter your house’s age, there is always something that you want or need to do. Whether that’s building shelves in the garage or putting in landscaping to help with rain runoff, or replacing the seal around the toilet, houses are one big, on-going project.
Ongoing Costs of Ownership
Once you actually move in, you can expect your total housing costs to be approximately 150% of the actual PITI mortgage payment. This includes utilities, repairs, and maintenance, but doesn’t include catastrophic stuff like trees coming down on the roof or cracks in foundations. Experts say to budget 1-3% of a home’s value for maintenance each year. You can maybe stay at the lower end for a simpler or newer house, but you’ll spend more for a more complex or older property.
Buying a house can be a great experience, and it is a lot more fun if you aren’t surprised by the expenses that come along. Being prepared will ensure that you’re ready for the expenses and that your new home is a blessing, not a burden.
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