Buying your first home is undoubtedly an exhilarating experience. You have been imagining home ownership for years and are so thrilled to be making it a reality. When you view your dream home, you begin to envision how great your life will be in it, and you can’t wait to sign on the dotted line. One of the best tips for buying your first home is understanding how the purchase will impact your overall financial health.
This is when you need to take a deep breath. It is crucial that you don’t let the excitement of it all cloud your sensibility. What you have to keep in mind is there will be first time home buyer expenses you did not necessarily think about.
You need to look at the full picture of what this home is going to cost you. If after you account for all of these extra first time home buyer expenses, you can still make it work, then start packing and enjoy your new life in your ideal home.
Extra expenses when buying a home is not always the first thing a first-time purchaser thinks about. None the less it is an important consideration.
Since this is your first home purchase, you are probably used to a landlord taking care of all of the maintenance involved with your home. You have become used to only making a phone call when something goes awry and then having it fixed with no loss to you.
As a homeowner, you don’t have this luxury. If something breaks, you have to fix it. You are also in charge of keeping the lawn looking good, which likely means you are going to need to purchase some new equipment and tools. You need to make sure you have the budget to set aside some funds each month to cover these unexpected costs. If you are in a cold weather climate and have a long driveway, don’t forget about the need to have someone plow you out when that big snowstorm hits!
Appliances and Furnishings
One of the most common extra expenses when buying a home that is often forgotten about is appliances! Unlike rentals, the majority of new or re-sale homes on the market do not necessarily come with all the appliances included. Without appliances included, you are possibly going to have to get yourself a fridge, washer, dryer, and perhaps a microwave before you can move in. Not to mention, you will probably need to get some new furniture to fill your larger space. You can buy the majority of these items used if necessary, but it will still cost you a pretty penny, and you need to be aware of it.
One of the larger expenses that many do not think about is the window treatments which can add up quickly. You are more than likely going to want to have curtains at the very least in the baths for privacy. Window treatments can be far more money that you ever expected especially if you want something of decent quality.
If you have been living at mom and dads to save money and have never rented a home, then you probably are going to need to budget for a lot more household items like silverware, glasses, cleaning essentials, tools and maintenance equipment like a lawnmower. Last but not least don’t forget you will also need to budget for food!
Mortgage and Homeowners Insurance
As a homeowner, you are going to want to protect your investment. In fact, you usually don’t have a choice when it comes to homeowner’s insurance. You often have to show proof that you have it when it comes time to close on your home. The insurance will protect you in the case of a fire or burglary. If you live somewhere that is prone to natural disasters (earthquakes, flooding, etc.), you will also want to get the additional insurance for those. There are of course ways to reduce your home insurance costs and should be something you should seriously consider. There are some things you can do that are easy to save money. For example, having the insurance carrier for your car also do your home.
On top of the homeowner’s insurance, if you put less than 20% down on the purchase of your home, you are also going to need to get mortgage insurance. This protects the bank funding your loan just in case you don’t make your payments (even though you know you will).
The good news is that the premiums for both of the insurances mentioned above can usually be included in your monthly mortgage payment, but that also means your payment is going to be higher than you initially thought.
Another thing you don’t have to pay as a renter is a property tax. This annual fee is non-negotiable and is usually disclosed on the home listing, so you know upfront how much it’s going to be. The percentage of tax you will be responsible for will vary based on the state that you live (with an average about 1% to 2% of your home’s value).
Again this can vary as there are some states where taxes can take up a much larger chunk of your hard earned money. In most cities and towns the taxes you will pay will be based on your properties assessed value combined with the local tax rate.
You can usually choose whether to divide this amount by 12 and include it in your monthly mortgage payment, or you can opt to pay it on your own as a separate bill. Either way, you need to be prepared for this additional first time home buyer expense.
The earnest money is the money you submit to the seller with your offer. It shows the seller you mean business so they can feel comfortable taking it off the market while the sale processes. If your offer is accepted, this money gets applied to the down payment or closing costs. If the offer gets rejected, you get this money back.
You need to plan on having typically at least 5% of the price of the home set aside for earnest money, but the more you can offer, the better. This is also one of those things that can vary from state to state so it would be important to consult with a real estate agent to determine before hand what is an average amount a seller will be looking for. For example, sometimes the norm for purchasing new construction will be ten percent down.
Thanks to the big housing crash in 2008, it is very rare that you can buy a home without a down payment. You need to prove that you are responsible enough to make your monthly payments, and having a substantial down payment saved up is an excellent way to do so. For FHA loans, you can get away with a 3.5% down payment, but most mortgages (conventional) would like to see closer to 5- 20% down.
If you are fortunate enough to be buying a home in a rural area, you might also qualify to get what is called a USDA loan. These loans are one of the few no down payment options left, but you can’t be purchasing in a city or densely populated area to get this type of loan. Again it would make sense to consult with a good Realtor before hand to see if this option is even available to you.
If you are feeling a little overwhelmed by all of these extra expenses, it’s not over yet. You also need to be prepared to pay the closing costs. They cover everything from preparation fees to attorney’s fees (too many other charges that you think are random that do have a purpose). Unless you can negotiate with the seller to pay the fees, you need to plan on an extra 3-4% of your home’s value to be paid at closing to cover these charges.
One of the first-time homebuyer expenses that are often forgotten about is real estate title insurance. Real Estate Title Insurance is a type of insurance that covers financial loss from defects in the title to your property and the invalidity of mortgage liens.
A real estate title policy is put in place to protect an owner’s or lender’s financial interest in a property against loss due to title defects, liens or other matters. The insurance will defend against a lawsuit attacking the title as it is insured, or pay back the insured for the monetary loss incurred, up to the amount of insurance provided for in the policy.
This is an expense that you should seriously consider as a first time home buyer. It is a one-time expense that if you ever need it will more than pay for itself. Just ask anyone who has ever had to defend a claim without title insurance. It is a real nightmare!
As you can see, there are some extra first time home buyer expenses that you may not have thought much about. It is critical to go into your new home feeling confident you have the financial means to owning your first home.
Many home buyers overextend themselves and then get caught in a real financial bind. Do yourself a favor and have a healthy reserve in case of emergencies. You never know when disaster can strike like losing a job or have some unexpected health issue.