When I purchased my very first home, I was shocked by all the miscellaneous expenses I incurred and wished I had been more prepared for what to expect. I planned on needing money for my down payment but closing costs were a grey area as were all the other incidentals that popped up along the way.
In this post we will cover some of the expenses you should plan for during the course of your home buying transaction. Prices for specific services (i.e. inspections, appraisals, recording fees, title searches etc) vary. The prices in this post reflect averages in our area and should be further researched by you when searching for services. Let this serve as a helpful guide so you can prepare ahead of time, so when its time to make an offer you know what to expect!
Closing costs add up quickly so it’s important to be prepared for that in addition to your down payment. At minimum you’re looking at 5k in closing costs (and usually this number is much higher and varies based on the price of the home, bank fees, taxes etc). Make sure you shop around and speak with both banks and mortgage brokers to see who has the best rates. Also make sure to ask about application fees, pre-payment penalties, additional fees available for lowering your interest rate and fees associated if you plan to request that you NOT escrow your property taxes. Keep in mind, there are fees for everything when buying a home so ask questions, don’t rely on representatives to fully inform you! Carefully review all the items on the estimated closing costs provided to you by your lender and ask questions as they arise, that’s what they are there for. Please don’t skim over the document and think you have time to ask questions at closing.
Another important bit of information to keep in mind regarding cash to close is where that money comes from and how long it’s been in your account. Many first-time buyers aren’t aware that the bank will be checking your account to see how much money you have towards that down payment and closing costs so if you will be relying on a cash gift from a relative make sure that happens at least 60 days prior to applying for your loan. Ideally, whatever money you are using as proof of funds will have been in your account for a minimum of 60 days since the banks typically ask for 2 months bank statements. Banks don’t like cash gifts right before your application. They need to see that those funds have been in your account for a certain amount of time otherwise they won’t consider it towards your total cash assets. Whenever I have a conversation with a first time home buyer those are the topics I cover. Try not to move money back and forth from one account to another. For every transfer the bank will want further explanation and proof. Bottom line, make sure all the money you need to close is in your main account at least 60 days before your loan application/underwriting.
How long do I need to get ready prior to applying for a mortgage?
When I meet people for the first time and my career as a Realtor comes up, I field lots of questions about the market, how fast inventory is moving and whats the best way to prep for the home buying experience. I always suggest taking at least a year to get in shape financially before taking real steps towards loan applications and home showings. Make sure you have a nice nest egg saved to cover the many costs associated with buying a home, extra funds to cover incidentals for unexpected purchases or repairs (which happens all the time) and moving costs which people often forget is an expense associated with this endeavor! (I will touch more on this later in the post). A strong down payment is 20% and in bidding wars money talks so the more you have saved the better shape you’re in.
Earnest money deposit:
This term refers to the deposit money you put in with your offer. This can be in one or two deposits. Based on your market you may need to offer several thousand upfront to show you are a serious buyer that won’t just walk away, and that money is proof of your true intent and commitment to buy. Typically, a fair offer is 1% of the purchase price for the first deposit. To strengthen your offer, you can add additional funds to this first deposit and then add a second deposit after inspections. This means, once the home passes inspections and both sides have settled on any repairs needed based on replies to inspection you the buyer will put down another cash deposit at that time. This further solidifies your commitment to the purchase of that home.
What are miscellaneous expenses?
Miscellaneous charges refer to items such as inspections, appraisals, repairs the home seller refuses to address and fall on you to address as well as all the necessary charges associated with moving. Remember, once all is said and done you still have to get your belongings from one place to another and this alone can cost several thousand! You will also want to consider purchasing a home warranty. A home warranty covers certain repairs that may pop up after you own the home. Depending on your package it may cover all major appliances, HVAC systems (think furnaces, boilers etc). Do your research and find a plan that covers as much as possible and watch out for co-pays and deductibles! I personally purchased one with my last home because it was old, and everything looked like it was about to explode. Not a full year later my HVAC system died, and my home warranty saved me around $15,000! They paid to install a new unit, the labor associated with such and the materials. I can’t imagine what I would have done if I didn’t have my home warranty in that situation. My story isn’t a unique one, this happens every day to millions of new home owners so be prepared and do your research.
Some items you will pay for during the course of your transaction are (I asked a title company we use often to send me a list of miscellaneous charges you will see at closing as well as some extras you will pay before hand):
- The Lender will require a closing protection letter ($125.00)/ paid at closing
- Additional policy endorsements ($150-$250) in addition to the premium/ paid at closing
- FedEx $15.50 per/paid at closing
- Tax/Utility Certifications – $50-$85/paid at closing
- Notary Fee Up to $75.00/ paid at closing
- E Doc Fee – $50.00/paid at closing
- Wire In from lender – $15.00/paid at closing
- Inspections- (prices vary, expect to pay $600 at minimum depending on where you live and the size of the home)/paid upfront by you the buyer at the time service is rendered
- Home Owners Insurance- (again prices vary, expect to pay $500 minimum)/paid in full prior to closing
- Appraisal- This is paid to the bank, but it happens before closing so it is NOT part of your closing costs due at the official closing itself. You pay this fee early on in the process and it varies by lender/appraiser approximately $600
- Home Warranty: at minimum expect to pay $500 in full/upfront
Don’t forget all the projects on your list and put them in order of importance. If you need to sand hardwood floors for example, try to do this before you move in if possible (it’s a messy job!). This would go in that miscellaneous column along with any other projects needed to make the home “move in ready”. Only address the must have items and budget for them asap. Other small projects or purely vanity projects as I call them, can be done later after you’ve had time to recoup from the closing. Keep in mind, you will be in this home for years to come, you don’t have to do it all at once. Save and plan and address those projects a little at a time. I have found that a lot of people change their minds and this comes with taking your time, seeing how the home grows on you and then choosing a direction based on that feeling.
Lastly, make sure you have cash on hand for the unexpected! Especially if you buy without a home warranty. Things go wrong and often, they go wrong without warning. If you are getting ready to buy in the Poconos, give us a call, we will help you get prepared for the process!