First-time homebuyers: The Forgotten Costs of Buying
Are you a first-time homebuyer? It’s exciting to be looking for your own home and searching Zillow or Realtor, looking for the right place to call home.
At this point, you have probably used an online mortgage calculator to determine how much of a down payment you will need. When I recently purchased a new house to accommodate my growing family, it took me back all the other expenses on top of a down payment that go into buying a home.
The additional costs that come up can add a few things to your budget that you don’t realize at first. Whether this is your first home purchase or not, remember to factor these costs in before you start looking for a home so you can better equip yourself to negotiate the price or better understand how much of a house you can actually afford.
The first thing to note is that these costs are unreimbursable. It is common for house negotiations to come apart and for buyers and sellers to go their separate ways. There may be a good reason for this, and as the buyer, you will be out some hard-earned money, but it might save you from making a bad investment in a home.
These are the forgotten costs of buying a home that you should be aware of whether you are a first-time homebuyer or not.
To Summarize The Article
Before you get too excited about saving up enough for a down payment on your first home and realize that you really haven’t saved enough, consider these forgotten costs of buying a home. By properly setting your house-saving goals in the beginning, you will be a whole lot less discouraged later on. The forgotten costs of buying a home include appraisals, home inspections, initial escrow payment, closing costs, and repairs.
For example, if you were planning on putting 5% down, thinking that was it, realize now you may actually need to double or triple that to cover closing costs and repair costs. Do things right and save properly. Don’t stretch your budget thin or think taking money out of your retirement account is a good idea to make up the other costs.
Lastly, put yourself in the mindset that you are going to lose $1,500 as soon as you put an offer on a house. There are various reasons why the deal may fall through, and you may not end up with the first house you go under contract with. First-time homebuyers struggle with walking away on bad deals because they don’t want to turn their back on the money they have already spent. While it isn’t pleasant losing $1,500 (appraisals, inspection) don’t allow your emotions to blindside you into buying a home that is either going to cost more in repairs than you have saved for or is not the right fit or a good deal for other reasons. Don’t be afraid to walk away.
Five Forgotten Costs of Buying a Home
1.) Appraisals
No surprise here; you have heard of houses getting appraised when people buy or refinance before. However, have you really prepared to save for it? I just spent $600 for my appraisal in Colorado. I’m not a big fan of appraisals, but I understand why they are necessary for lenders. However, it feels more like a redundant system as appraisals often end up at the same price you and your realtor have decided to offer. This is an expense that you will incur that is unreimbursable. If you back out of the house, it is a sunk cost. If you need to get another appraisal because you disagree with the first appraisal, this is another consideration.
What is an appraisal?
Appraisals are meant to let the lender, aka the bank, know if they must foreclose on your home and what they can reasonably expect to sell the house for. An appraiser will do a few things. They will search for recent sales of similar homes in the neighborhood to gain an understanding of the going house prices. They will make a judgment call on the current housing market and whether they think the market will continue going up or down in the future. Additionally, they will walk through the home and assess its layout and condition. Then they come up with a number of what they feel the home is worth.
2.) Home Inspection
Again, no surprise here. Home inspections are part of the process of buying a home. However, you need to make sure you have budgeted for this. Before buying my most recent home, I looked at home inspection costs averages. All the online resources were way under what I paid, so I was unpleasantly surprised by the actual cost of inspecting a home. I paid $650 as the base amount to have a 1200 sq foot home inspected, and a few years back, I paid $500 to have a condo inspected. This is double the averages I was finding online, and yes, I checked a few home inspectors. The base cost for an inspection isn’t always enough either because there are a lot of additional specific inspections you can add on that can be worth it.
First-time homebuyers should note that when you are spending upward of a quarter of a million dollars on a home, skimping on a thorough inspection to save $500 is not the wisest choice. Additional common inspections and tests that you can add to the base inspection are radon testing (recommended by the EPA even if you are buying a new home because it is the leading cause of lung cancer for non-smokers), mold inspection/test, septic/well inspection, and sewer line to home inspection.
After adding some of these additional inspections, you will easily be at $1,000 for a home inspection. Once again, this will be lost money if you don’t buy the home, but it is money well spent either way.
3.) Repair
I’ve never bought a brand-new home, and even if I did, I probably would have found a way to upgrade something in the home. Repair costs need to be factored into your savings for a new home. This depends a little bit on the buyer. If you are getting a brand-new home or a completely renovated home, you may have to worry about this less, but you will pay a premium for it. Most of the time, even if some part of the home has been renovated, you will pay for some other repair cost. A hot water heater may go out, carpet needs to be replaced, the roof needs to be redone, the backyard needs to be re-landscaped, windows need to be fixed, a wall needs to be knocked out, a crooked door needs to be fixed and repainted, and so on.
Before you have begun touring homes and are still in the savings phase, keep repair costs in mind. You won’t be able to nail down exactly what you are going to need but I would recommend setting aside $5,000 for the minimum amount. After purchasing that new home, you will really want to do something to it, whether it be getting rid of ratty carpet or replacing old blinds. If you don’t use your repair budget, you can then allocate it to an emergency fund for the time when something goes wrong or put it towards that mortgage. This is one thing that I have always done, and I have been really grateful that I took an extra 6 months to accrue a repair fund before buying a home. First-time homebuyers I want you to be savvy/prepared and not the average first-time homebuyer.
4.) Initial escrow payment
Escrow is used to pay property taxes and insurance. These are usually factored into your monthly mortgage payment, as is the interest payment. At closing, you are faced with an upfront payment of two months for these expenses. This is just another expense most people don’t consider when saving for a home. This is a hard category to give an estimate on what is a reasonable amount to plan for, but I would say putting an extra $500 in the savings account would be wise.
5.) Closing costs
If you are a first-time homebuyer, just know that we all face closing costs, and no one likes paying them. There is only one way to get around them, and that is to have the seller take care of them if you are lucky. It is a good rule of thumb to have 2% – 5% for closing costs based upon home value. A $350,000 home with 4% for closing would mean you need an additional $14,000 on top of your down payment. What does the closing cost go for? Well, it can go to some of the things we mentioned already like an appraisal, inspection, and escrow, however, there are various other costs that we haven’t talked about. Closing costs can include title search, credit report, recording fees, underwriting fees, HOA transfer fee, closing fee, and application fee, to name a few.
First-time homebuyers feeling the struggle?
Are you not sure how you are going to be able to save enough to buy a home? Many people feel the same way, especially when housing prices are surging. Take a deep breath; people from all walks of life figure it out. Have patience and determination. The more you work to get there, the sweeter it will be in the end. At BlackBird Finance, we are here to accelerate your prosperity and help you achieve your financial goals, so reach out to us and see if our services are worth the investment for you. We feel they are, sign up for a discovery call.