There are many things home buyers learn throughout their first home buying experience. Much shock and disappointment could be avoided if buyers understood the additional expenses which come along when buying a home; not just the down payment and mortgage payment. Yes, all upfront costs in a loan transaction will be laid out with the Closing Disclosure form; but borrowers should truly know what they are getting themselves into financially before they’ve signed on the dotted line.
So alert your clients of these hidden costs for first-time buyers:
Down payments are one aspect of financing that first-time homeowners may not fully understand before purchasing a home. The standard down payment for conventional financing is 20% of the purchase price of the home, though this is not the only way! Most people still believe that a 20% down payment is required to get into their first home. In fact, 76% of individuals in a recent Fannie Mae study say they were unaware of low down payment options such as a 3 or a 5% down payment program. The Polder Group at Summit Funding’s low down payment programs can significantly help first-time home buyers get into the home they love.
Private Mortgage Insurance (PMI)
PMI is an added insurance policy to protect the lender in the event that the buyer cannot pay their mortgage and the loan winds up in foreclosure. Private Mortgage Insurance can be paid for all at once, when the loan is closed, or in monthly installments that are added to the mortgage payment for the loan. If the borrower cannot make a 20% down payment, paying for PMI can help them get into a home when they may not have been able to before.
Before closing on the house, it is generally a good idea to get a home inspection. A Home inspection will verify if there are hidden issues and will provide an in-depth analysis of the home, bringing to light things which might otherwise be missed. These inspections generally run a couple hundred dollars, but are widely considered worth it to the buyer as the information could save hundreds, if not thousands of dollars, in the end. Find limitations and exclusions to home inspections here.
Home Appraisals are unbiased, professional opinions on how much the home is worth. Appraisals must be done before closing so the lender can verify that the value of the home is at least the amount the buyer is paying for it. While also ensuring the subject is structurally safe, sound and secure. These can cost a few hundred dollars, but can often be rolled into the loan amount.
Closing costs, sometimes called settlement fees, are paid when closing on a home. These are fees charged by people taking care of the purchase process, including the lender, real estate agent, and other third parties involved in the transaction. Some of these costs can be rolled into the loan, allowing less cash out of pocket to be needed at closing.
Closing Costs can include:
Government recording costs, appraisal fees, credit report fees, lender origination fees, title services, tax service fees, survey fees, attorney fees, underwriting fees, etc.
Earnest money is a deposit which the buyer submits at the time they make an offer to show that they have a serious intent to purchase the home. Most often, the amount is between 1-3% and the funds are generally held in escrow with the Title Company or closing agent. Earnest money is not a separate expense as it will be applied to either the buyer’s down payment or closing costs. However, it is worth mentioning because the funds are typically paid when the offer to purchase is made rather than when the loan closes. Depending on the terms and conditions of the contract, the buyers could possibly get this money back if the sale does not go through. So it is important to review these terms carefully before making an earnest money deposit.
A buyer will need proof of homeowner’s insurance before the mortgage loan can be completed. Not only is it a wise thing to have, but insurance is required by the lender to ensure that the mortgage will be paid off, or the property will be repaired or rebuilt to its current value, in the case of disaster. A buyer may also consider flood insurance, even if they don’t live in a flood zone, just in case.
Buyers should always check the property tax rate for the new home. Local rates can vary by area depending on school, fire districts, etc. The buyer may owe the previous homeowner for some portion of fees already paid as they are paid yearly and are split when the home is sold.
Cost to Move In
First-time homeowners often forget how all the little things add up; make sure the buyers know to consider these in their budget as well:
Moving expenses – moving truck, boxes, hiring movers, feeding friends to help with the move.
Appliances/Furnishings – many homes don’t come with appliances or furnishings which are other expenses buyers need to keep in mind before deciding to purchase.
Maintenance costs – unless the home is a fixer-upper, buyers may not have too much work to do, but they should budget in small fixes and adjustments in their total budget.
Monthly Bills – many buyers don’t consider the change in monthly bills they will have with their new home, not only mortgage, but utilities, water, garbage, etc.
If you or your clients have any questions about the hidden costs for first-time buyers, please have them give The Polder Group at Summit Funding a call!