I was just emailing with a reporter about homebuying costs, and I thought I would share my long version here with you. We were talking about how buying a house is more expensive than it seems, and in parts where you might not be expecting to spend money. 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.
There are several phases to home buying, and they are all more expensive than you 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 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. 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:
- 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
Even with a new house, there will probably be some thing that you want or need to do. Houses are one big, on-going project.
Ongoing Costs of Ownership
Once they’re into their new home, I advise clients to expect their total housing costs to be approximately 150% of the the actual PITI mortgage payment. You need utilities to run your house, and things will need maintenance: dishwashers break, toilets clog, and mice are really crafty!
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 alone. Being prepared will ensure that you’re ready for the expenses and that your home buying purchase goes smoothly.
the cute yellow house photo is by: Lara604
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