Buying a home is exciting. It’s also overwhelming. Budgeting for the purchase means not only the sales price, but well beyond that. If you focus only on your down payment, you may end up underwater right away. Here we discuss the common and most overlooked expenses your budget must include. This way you can properly budget for your next home purchase.
This one’s obvious. Unless you are a veteran or purchase a rural home, you need a down payment. The amount you need could range from 3% to 20% of the sales price. The program you choose determines the minimum down payment.
You can always put down more money on a home. Remember, though, your lender must source the funds you use. This is how the lender determines the money is yours and you can afford the down payment. You can’t use borrowed funds or funds you can’t prove their source.
This is something many borrowers underestimate. Plan for the highest amount, which should be 5% of your loan amount. On a $150,000 loan, this means $7,500. Of course, the amount you need varies by lender. Each lender has specific fees it charges. We recommend shopping with at least 3 lenders. This way you can compare closing costs.
Closing costs include lender fees and 3rd party fees. Lender fees include:
- Origination fee
- Discount points
- Processing fee
- Underwriting fee
- Document preparation fee
A few examples of 3rd party fees include:
- Title insurance
- Title search fees
- Appraisal fees
- Recording fees
- Escrow fees
- Notary fees
The amounts and names of the fees may vary by lender.
Prepaid Interest, Taxes, and Insurance
Depending on when you close on your loan, you may owe prepaid interest, taxes, or insurance. If you set up an escrow account, the lender determines what you must pay ahead of time. At a minimum, lenders require a 2-month cushion. Again, depending on the timing of your closing, you may owe more. It depends on when your taxes are due and payable. For example, if you close on July 1st and your taxes are due on September 1st, you will owe 6 months of taxes. This is because your 1st mortgage payment won’t occur until September 1st. There aren’t any payments that will fund your escrow account before the taxes are due.
Your homeowner’s insurance works in much the same way. Most lenders require proof of payment of 12 months of homeowner’s insurance upfront. This way you only owe 2 months for the escrow account. Figuring in 12 months of the insurance can help you with your budgeting for the home.
Prepaid interest is the interest that accrues before you make a payment. If you close on July 1st, but don’t make a payment until September 1st, you owe 30 days’ worth of interest. This is because you pay interest in arrears. Your September 1st payment covers the interest for August. Nothing covers the interest for July though. This is what you pay upfront.
Home inspections aren’t required. However, most lenders encourage them. This helps you understand the true state of the home. For example, if there is mold in the attic, you likely wouldn’t know. This could deter you from purchasing the home, if you knew.
Consider the home inspection an insurance policy. It helps you make the right decision. If the inspection turns something up, you have options. You request that the seller fix the issues. You can also back out of the contract if you have an inspection contingency in the contract.
More Expensive Utility Bills
If this is your first home, you may be in for a surprise. Utility bills on a home are often much higher than those paid for apartments. Even if you lived in a home, but are upgrading, the bills may increase. Planning for higher bills when you are budgeting may help you avoid a financial crisis.
Plan for the Unexpected
New and existing homes have problems. You can’t predict what may happen. Plumbing busts, roofs leak, and appliances stop working. These are just a few minor examples of what could happen. Budget enough money for an emergency fund. You leave these funds alone unless you have a true emergency. This way you don’t touch the money used for your monthly obligations. It avoids the risk of default on your mortgage and other monthly obligations as well.
Furnishings and Decorations
Let’s not forget the fun stuff! When you move in, you will likely want furniture. Where will you sit? What about eating your meals? What about decorating the home? An existing home may even require some changes, especially if you don’t like the existing décor. You’ll likely have to take one step at a time, but budgeting for a few fun things can help you make your house a home.
If you purchase a single-family home, don’t forget about outside maintenance. Cutting the lawn is a given. You can do it yourself for hire a service. Either way, you may need a new lawn mower or other tools. You may also plant bushes or flowers or spruce up the exterior in other ways.
Budgeting for a home purchase means more than thinking about the purchase price. There are many other costs involved. Before you buy a home, get an idea of the average costs for the area. Ask around about average utility costs. Call a few insurance providers and find out the cost of insurance. Some lenders also let you choose your own appraiser or title company. This gives you more flexibility with the cost of these services.
You can tailor the other expenses based on the money you have. If you budget well ahead of time, you can make sure you have enough for everything you want. If not, remember, homeownership is a work in progress. Take your time and enjoy the ownership. Everything will fall into place eventually!