October 20, 2021
With real estate gaining value and interest rates holding steady, the idea of taking the plunge into homeownership is a compelling one. However, first-time home-buyers are often surprised to discover that purchasing property is a detailed process with additional costs that go beyond a home’s “sticker price.” Most of these expenditures are unavoidable or inevitable. They represent the real cost of buying a home. We’ve listed the most common ones in the order you’re likely to encounter them.
Earnest Money: To secure a contract on a property, a buyer must put down earnest money that will be deposited into an escrow account and held until closing. The amount can be as little as one percent of the purchase price or as much as 10 percent. A contract will detail conditions for its forfeiture and application to the sale. Buyers often stipulate that the home must pass a home inspection and appraise at sale value to ensure they can regain earnest money if the deal falls through.
Home Inspection: Having a professional home inspection should alert you to any safety or structural issues regarding the home or problems with the property’s mechanical systems or appliances. Inspectors typically check everything from roof condition and attic insulation to mold and mildew problems in crawl spaces and basements—and everything in between. They may advise further consultation with trade experts like an HVAC specialist, plumber, electrician or septic system contractor, for example.
A general home inspection performed by a Louisiana State Board of Home Inspectors-certified professional usually will cost between $300 and $500. Trade contractors asked to formally evaluate a system typically also charge a fee. Likewise, a termite inspection by a certified professional is also usually required and will carry a separate fee.
Repairs: A home inspection may identify or confirm any number of needed repairs. These are usually negotiated with the seller to become conditions within the final purchase agreement. In some cases, buyers can ask for either the completed repairs or lump sum amounts to be disbursed at closing to cover the repairs later. For mortgages administered under federal programs, repairs usually must be completed before a sale.
Repairs can be deal-breakers because if a seller refuses to fix those issues, you will be paying for that repair. If you’re buying a home in July and the air-conditioning system is old and temperamental, you may face an immediate significant cash outlay. In older homes, even seemingly simple modern updates may require significant modifications.
Appraisal: To document that the property is worth what you agree to pay for it, mortgage underwriters rely on an appraisal — an objective assessment of square footage, amenities, features, condition, comparable sales and market value. Appraisals typically cost $300 to $500 or more and often must be paid by the buyer up front. Note that if the appraisal value falls short of your agreed-upon sale price and loan-to-value parameters, you must make up the difference out of pocket. This can become problematic in highly desirable housing markets experiencing bidding wars.
Closing Costs: Getting the paperwork that ensures a property is free of any financial claims and is satisfactory to mortgage underwriters costs money. You will usually see these charges tallied on a disclosure sheet. Some you may have already paid—the appraisal, for example, or termite inspection. Others will include everything from document and attorney fees, loan application fees and points to the next year’s worth of taxes. As a general rule, closing costs usually align with a figure that is two to five percent of the purchase price.
Mortgage Add-Ons: Your mortgage payment may consist of more than repayments to the principal that you borrowed and the interest that your lender charges. If you closed on the house with less than 20% equity, borrowing more than 80% of the value, your lender would tack on PMI—private mortgage insurance—in case you were to default on the loan. Many lenders will also handle yearly property taxes by budgeting them through monthly mortgage payments, holding them in escrow and disbursing them to the proper agency when due.
Since lenders usually require homeowner’s insurance, they often collect and escrow funds for that as well. Depending on your situation, you may need additional riders, flood insurance or personal liability umbrella policies for the property.
HOA Fees: Homeowners associations and their fees can have a substantial influence on your finances. Some HOAs are more relaxed, keeping annual dues low and oversight of rules and bylaws moderate. Some are strict and may even issue fines to preserve neighborhood appearances and home values. Others may use high annual fees to maintain a lot of common-area amenities and pay for future conveniences and repairs.
In some cases, residents may be legally bound to share the costs of large expenditures through emergency assessments. If you’re considering buying a home in an area with an HOA, be sure to understand your responsibilities as a resident.
Extra Taxes and Community Contributions: Some areas level extra taxes for special projects, educational needs or local development. They may have a per capita head tax, ad valorem taxes on property or possessions, or even special school zone taxes. Shopping in area stores may come with local parish or municipality taxes that are added to each purchase to benefit the community. To save a little, check to see whether public services like fire departments or emergency medical responders who serve your residential area offer low- or no-cost services in exchange for annual membership contributions.
Take Sure Steps into Homeownership
Homeownership is about more than having a place to live. It’s a legal and financial investment in taking your place within a community. If you would like to know more about the home-buying process or what the cost of buying a home would be for you, you can start by exploring our Mortgage Center or reaching out directly. Our mortgage lending specialists at La Cap are ready to show you just how much home you can afford.