Buying a home is one of the biggest purchases you’ll make, so it’s important to understand the different costs. When you buy a home, you’ll pay more than the listing or accepted price of the property. You also have to factor in additional costs like insurance and a down payment. Here are a few other costs you should factor into buying a home.
Homeowners Insurance
Most lenders require buyers to purchase a full year of homeowners insurance before closing the loan. You can price shop different insurance providers, but you’ll need to purchase a policy and issue proof of payment to the lender before your closing date. Your homeowner’s insurance policy should also meet the minimum requirements set by your lender.
The cost of a full year of homeowners insurance will vary, depending on the value of your home, your deductible, and the policyholder. It’s usually a good idea to shop around to find the best rates with the best coverage.
Down Payment
Most lenders require a down payment, which is a large sum of money that the buyer pays toward the purchase. Down payment requirements depend on the lender and the home’s purchase price. The loan type you choose also affects how much of a down payment you’ll need to close on the property.
For example, most conventional loans require around 20% down payment. Federal Housing Administration, or FHA loans, offer lower down payment requirements to first-time home buyers, usually around 3% to 4%. Some lenders offer down payment assistance or lower down payment requirement programs to veterans or other eligible buyers. It’s always a good idea to ask about these programs so you can potentially lower your out-of-pocket costs. Also, it’s never too early to begin boosting your savings account and saving up for a down payment.
Inspection
An inspection is a thorough evaluation of the home you’re considering buying. Inspectors review different parts of the home, including the appliances, roof, walls, and basement, to ensure there aren’t any major problems. Some lenders require an inspection, but even if yours doesn’t, it’s usually a good idea.
You can use the results of the inspection to request that the seller make repairs or lower the price to offset any expensive repairs you may need to make before living in the home. You may have some control over the price of your inspection since the lender typically allows you to hire your own professional. However, keep in mind that your insurance company and lender may want a copy of the inspection report.
Appraisal
Many mortgage lenders require an appraisal, which is a market evaluation that estimates the home’s value. An appraisal ensures that the property is worth the price you offer to pay, which helps protect the lender’s investment. A professional appraiser reviews your home’s condition, what similar homes sold for, and how much in your area in the last couple of months.
The lender will typically only issue lending up to the home’s value, meaning if you offer to pay over, you’ll have to pay the difference. An appraisal can also help protect you from purchasing a home that’s not worth the asking price, putting you in a difficult financial situation, also known as an underwater mortgage.
Lender Fees
Lenders require a series of fees, including origination points, underwriting costs, and credit check fees. While it varies, lender fees are typically somewhere around 1% of the total loan value. Most lenders also conduct a title search and issue title insurance, ensuring the property is sellable and transfers to you properly.
Closing Costs
Closing costs refer to the fees you’ll have to pay before closing the loan and officially owning the property. Your closing costs vary, depending on lender fees, appraisal costs, down payment, and home purchase price. You can usually expect to pay somewhere between 1% and 6% of the total loan value in closing costs. Eligibility for certain low-cost programs can help you reduce closing cost requirements.
Closing costs may also vary by state, and a quick search can help you learn the average that homebuyers pay in your area. For example, a search for “how much are closing costs in AZ?” will tell you that when buying a home in Arizona, you can expect to pay closing costs, including loan origination fees, attorney fees, homeowner’s insurance, and title search.
Other fees that may be a part of your closing costs include escrow fees, property taxes, flood certification, or recording fees. It’s always a good idea to ask for a breakdown of your costs so you can prepare for your closing date.
In summary
Buying a home requires more than paying the asking price of the property. Buyers must also cover additional expenses, like appraisal, inspection, lender fees, and closing costs. Be sure to calculate these costs before agreeing to purchase a home to understand your financial obligations better.
