Before committing to a mortgage, it’s important to factor in additional expenses, such as closing costs, insurance and taxes. You may be able to afford your dream home, but the costs associated with buying a home go beyond the mortgage payment. To determine how much house you can afford, it’s important to factor in these additional expenses.
Here we go!
The Down Payment
Your down payment is the money that you come into the home purchase with rather than financing it through a mortgage. For example, if you’re buying a $900,000 home and put 20 percent down, or $180,000, you’d be getting a mortgage for $720,000.
A down payment is required for a conventional or FHA loan. The amount of the down payment needed is based on the home’s price and property type, as well as the loan product.
Down payment requirements vary depending on the lender and loan type. You might need to put down 3 percent, 10 percent, 20 percent or more. With an FHA loan, you could put down as little as 3.5 percent. Typically, the only type of mortgage that doesn’t require a downpayment is a VA loan reserved for our military members and veterans only. If you’ve served our country, we should talk about the benefits you’ve earned to help you purchase a home!
Closing costs vary depending on the lender, but typically range from 2 percent to 5 percent of the loan principal. They may include fees for processing the loan, underwriting, document preparation, and other services.
Fees associated with taking out a mortgage loan include an application fee, an appraisal fee, and a home inspection fee. The appraisal fee is important in verifying that the property is worth the amount of the loan. A home inspection is highly recommended, but not required, and can help to identify any problems with the property before the deal goes through.
The credit check fee is a nominal fee charged by the lender to ensure that the borrower’s credit is in order. The origination fee is the administrative fee that the lender charges for generating and processing the loan. Title insurance protects the lender in the event that there are problems with the borrower’s ownership once the sale goes through. Fees for title insurance usually start at .5 percent of the loan amount.
The fee for a title search company varies depending on what you’re purchasing. A new-build home generally doesn’t require a title search, but if you’re buying anything else with a mortgage, the company will need to consult property records to verify that there are no encumbrances such as liens on the property’s title. The amount of the transfer tax also varies by location.
Additional cash you might need…
Lenders may require borrowers to show that they have additional cash at their disposal to make sure that the borrower isn’t completely wiping out their bank account. This acts as a form of guarantee that the borrower will be able to make mortgage payments. The typical requirement is for two months’ worth of mortgage payments in reserves.
Your biggest expense in your home will likely be your mortgage payment. This number should be considered when budgeting for other costs.
In most places, you are required to pay property taxes on your home for as long as you own it. Property tax can be included in your monthly mortgage payment or paid in directly to the county assessor. Most homeowners include it in their monthly payments so it’s spread out over the year and they’re not hit with unexpected tax bills.
The assessed value of your home is not the same as the price you paid for it. If home values go up in your area, your city or county could assess your home at a higher value, meaning you’ll pay more in property taxes. This is usually assessed in small increments. If property values drop below what you paid for the home, you can appeal your taxes and have the amount reassessed with current values.
Homeowners insurance is important for protecting your finances from unexpected events that damage your home, such as natural disaster, theft or vandalism. Though it’s not required by law, most mortgage lenders require it in some form. The cost of homeowners insurance varies significantly, so it’s best to compare offers to keep the expense as low as possible.
You’ll likely be required to pay a monthly fee if you’re buying a condo or another kind of home in a community overseen by a homeowners association. This fee, known as an HOA fee, is determined by the association and highly variable. The funds go toward the services the association provides, which may include security, a pool or gym and landscaping and maintenance.
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