Hidden Expenses to Look for When Buying a Home
For the most part, buying a new home is an exciting experience, especially for first time home buyers. The process seems so easy to complete. You make an offer, you haggle a little, then the buyer accepts your offer. For better or worse, “that’s when the rubber hits the road.” You slowly begin to learn about all the hidden costs that go into buying a home. While these costs almost always come as a shock to first time home buyers, they also seem to sneak up on experienced home buyers who simply forgot the number and amount of little extras that tend to pop up.
Pre-Escrow Hidden Costs
When you settle on a purchase price, it’s best to consider that the starting point. The first payment you might encounter is called a good faith deposit. This should be considered a pre-escrow hidden cost. A good faith deposit is an amount (approximately 1% of the purchase price) that you pay the seller to hold the property off the market during the negotiating process. In some cases, it might be refundable, but often times, it’s considered non-refundable. In almost all cases, the amount will be applied towards the final purchase price should a deal be struck.
Hidden Escrow Costs
When a deal has been struck, an escrow account will be opened for the purpose of controlling escrow costs. This is the account where your initial down payment will be recorded. A typical down payment ranges from 10-20% of the purchase price. Should the deal fall through from your side, the down payment will be refunded minus any escrow costs incurred to date. If the seller pulls the plug on the deal, they will be responsible for those costs. Assuming everything goes along without a hitch, here is a list of hidden costs you can expect to see.
1. Homes Inspection Fee – Prior to approving your loan, your lender and/or mortgage insurer will most likely want confirmation that the home does not have any serious structural, electrical or plumbing issues. In some states, a termite or pest report is also required. The inspection is carried out be an independent party who issues a report and recommends repairs.
2. Appraisal Fee – In order to assure the home is properly valued prior to approving a loan, lenders want a reputable licensed appraiser to determine the fair market value of the home. As long as the appraisal amount is greater than or equal to the agreed upon purchase price, the process will move along without a hitch. If the appraisal price comes back lower than the requested loan amount, the lender will require you to make an additional down payment to bring the loan-to-value within the lenders stated guidelines.
3. Survey Costs – Unless the property is in a tract, you might want to have a licensed surveyor confirm the property’s boundaries in order to avoid later disputes with neighbors.
4. Closing Costs These are the costs incurred to process the deal. They include
- Credit Check Fee
- Escrow Fee
- Title Insurance Fee
- Loan Application and Origination Fee
- Title Search Fee
- Recording fee
- Miscellaneous, including PMI insurance should the down payment be less than 20% of the purchase
5. Property Taxes and Homeowners Dues Should the closing date come after the seller has made the property tax and homeowner dues payments, you will be required to reimburse them through escrow for your pro-rata portion. After the closing, the county tax assessor may re-appraise the property, which could result in a refund or additional taxes.
6. Homeowners Insurance – Prior to funding the loan, your mortgage company is going to require you to purchase a homeowners insurance policy that protects the lender’s interest from damage caused by fire or natural disaster.
Remember: it’s always possible to have the seller pick up certain closing costs as part of the negotiation process.
Post Closing Hidden Costs
After the deal is done and the property is legally yours, it’s time to address all the little repairs and alterations you want to make to the property. You should be prepared for things that may have been missed by the home inspector. Be sure to include these estimated costs in your overall new home budget!
As a rule of thumb, all these hidden costs should come to about 10% of the purchase price. While some of the costs will be handled through escrow and covered by your mortgage, you want to make sure you have about half the 10% set aside in cash. By being aware of all these hidden costs, you can make the home buying process a little more enjoyable.