As a first time home buyer it is important to be aware of the very expensive additional costs that you will incur at closing.
Many first time home buyers get a rude awakening when it comes time to close because closing requires much more cash available than simply the down payment.
You must have extra funds immediately available both prior to and at the formal closing with the title company in order to buy your new home.
I know you will be excited to move in so I want you to be prepared and not stressed about these extra expenses.
Below are my six hidden costs to budget for when buying your first home –
It is difficult to estimate the cash amount for every one of you because each state is different and everyone borrows a different amount of money to buy their home. As a rule of thumb, you should have 2-5% extra cash available when your offer is accepted to cover the following expenses.
1. Home Inspection
Inspection of the property. You should always, without exception, have a licensed inspector assess the property and provide you with a formal report of their physical inspection of your soon to be home.
Estimated Cost – $1,000
2. Mortgage Lending Fees
These fees are charged by your mortgage lender and are a percentage of the amount you will be borrowing.
Estimated Cost – 1.5% of mortgage loan amount
3. Title Insurance
This is only required if you have a mortgage but even if you are paying cash it is a must purchase in my opinion. This is an insurance policy guaranteeing that the seller is transferring you clear title to your new property.
In simple terms, this means that the insurer will protect you in the event of a title dispute with the former owner of the property or someone who is making a claim towards ownership of a part of your land.
Estimated Cost – $1,000
4. Attorney’s Fees
This is self explanatory, if an attorney is representing you in the transaction they will be paid at the time of closing.
Estimated cost – $1,500
5. Mortgage Recording Tax
Every local government that records your mortgage requires you to pay a fee for keeping track (recording) your mortgage in their register. This fee is always a percentage of the mortgage amount being borrowed.
Estimated Cost – % of mortgage loan amount (varies greatly by government)
6. Escrow Payments
These are payments you make into a special account of your mortgage provider to ensure that you pay certain costs on time. The most commonly escrowed expense is the first year of your property taxes. Sometimes homeowners association fees, water and sewer bills may be escrowed up front at closing as well.
Estimated Cost – It Depends!
These hidden costs are not a complete list but definitely include the most common expenses that you will be responsible for at closing.
I have seen all too often that clients save for a down payment, get their offer accepted but then get bamboozled at closing with well over $10,000 worth of costs that must be paid in cash on the day of closing.
Be prepared, get your costs in order and enjoy your dream home!