Purchasing a home is one of the biggest financial decisions you will make in your lifetime. Most first-time buyers know that they will need to save for some form of down payment, but aren’t aware of the other out-of-pocket expenses they’ll face when purchasing real estate.
The Brick & Corbett Group has helped first-time buyers navigate the purchase process literally thousands of times; we know a thing or two about what buyers need to be prepared for and what checks they’ll need to write.
Here’s a list of the six things you’ll need to have some money set aside for when it comes to your next purchase.
- Home Inspection
You wouldn’t buy a car before making sure it’s mechanically sound, right? The same goes for a house. Just because the listing photos look pretty and you get that warm and fuzzy feeling standing in the living room doesn’t mean there aren’t gremlins lurking behind the wall.
The findings that come from the inspection can help you negotiate price and repairs. Generally, you can expect to pay between $300 to $500 depending on the home and the location.
- Appraisal Fees
Before approving a mortgage, a bank wants to make sure that their making a wise investment. They do this by conducting an independent appraisal of the property to make sure that the appraised value of the home meets or exceeds the purchase price of the home.
In most situations, the home buyer is responsible for paying for the appraisal. Depending on the size and complexity of the property, this can range anywhere from $300 to $1,000.
- Title Services
Title services are what many real estate professionals call “closing costs”. These closing costs include the fees the title company will charge in order to process all the paperwork and legally transfer the title for a property from one owner to another, as well as title insurance your lender will likely require to ensure that the title of your new home isn’t in dispute.
These title services will vary depending on your market and the value of your soon-to-be new home (title insurance gets more expensive as the value of the home goes up), but a typical bill from the Title company is about $1,300.
- HOA Fees
If you’re buying a home in a neighborhood with a Homeowner’s Association, you’ll often be required to pre-pay the first year of HOA dues. You may wind up with a discount here since the seller of the property will be responsible for the potion of the year they owned the property, but you’ll need to cover the rest.
Based on the typical HOA fee in Northern Michigan, if you’re buying in a neighborhood with an HOA, set aside $300 to cover any fees.
It seems like there’s a tax for just about everything nowadays; a fact you can’t escape even at the closing table. When buying a home, you’ll be responsible for the prorated amount of property taxes for the year, in advance. This means that if you purchase a home at the beginning of May, you’ll pay the May – December taxes on the home at the time of closing.
For many buyers this allows them to not worry about having to make tax payments for the rest of the year, but don’t get complacent. It’s a horrible feeling to get a tax bill in the mail and realize you haven’t been setting money aside for it, so consider taking advantage of the free escrow service most mortgage lenders offer that will add 1/12 of your estimated annual taxes to your mortgage payment each month. When it comes time to pay the taxes, the bank does it for you, another convenient option.
Your tax bill will depend on the value of your new home, your local millage rate, and when your transaction takes place. To be safe, set aside $3,000 for property taxes.
- Home Insurance
Most mortgage lenders will require a homeowner to carry home insurance, an absolutely essential expense when it comes to protecting your real estate investment. Without home insurance a homeowner is on the hook for any sort of damage, natural disaster, or event that could affect the livability of their home. Without home insurance, a homeowner could suffer a devastating house fire and lose their entire structure, but still be on the hook to pay the entire mortgage.
Most banks will offer the same escrow service that they offer for taxes to homeowners paying their insurance bill, so take advantage of that and make it easy on yourself. A typical year of home insurance will cost about $2,000.
Total Costs and Options Home Buyers Have
The idea that you need an additional ~$8,000 in cash on top of your down payment to complete your first real estate transaction seems daunting to many, but don’t worry, there are options if your cash flow is a little light.
Certain government-insured mortgage options like FHA mortgages, VA mortgages, or RD mortgages offer ways to take the closing costs for your transaction and roll them into your mortgage, allowing you to pay little or nothing out of pocket. They also offer reduced down payment options, further lightening the cash need, and allowing homeowners to focus their funds into maintaining and improving their property.
If you’ve got questions about the home buying process or want to speak to a Brick & Corbett recommended lender, our team is ready to help. Check out our Home Buying Guide, or reach out to the team directly to get the conversation about your dream home started. We can’t wait to talk!