The following post is by MPFJ staff writer, Grayson Bell. Grayson, who runs the finance blog Debt Roundup, is a fan of personal finance, brewing beer, and working on cars.
There are so many things to think about when buying a home.
The process is very involved and it takes a lot of work to get through it. Having gone through the process myself quite recently, I have a few words of advice, but also something you should do before you even go through everything.
The reason buying a home is such an involved process is due to how much information needs to pass through different companies. All of your information is verified, then verified again. But, here is the first step you should take when you want to buy a home.
Can You Truly Buy a Home?
Many professionals tell you to check your credit before you buy a home. I do think that is sound advice, but you really need to do something else first. You need to understand if you can truly afford to buy a new home. You need to create a budget for all the costs necessary to obtain and close on a new home, along with moving in and any repairs.
It costs money to obtain a mortgage, so why not create a home buying budget before to see if homeownership is attainable?
If you can get the costs associated with this process together, then you will have a better picture of your financial situation. Here are some of the costs that come when buying a home.
Credit Report Pull – This fee is paid at closing, but it costs money for the lender to pull your credit report to see if you can qualify for a mortgage. It might range from $25 to $50 depending on the lender.
Due Diligence Fee – This is not required when you put an offer in on a home, but more and more sellers want to see it. You can choose the amount, but a go-to is around $250. This money shows the sellers you are serious about your offer. The due diligence period gives you time to get an inspection, home appraisal, and find out if you can afford the home. If you pull out of the contract during this period, the sellers keep the money. If you reach closing, this fee is credited back to you.
Earnest Money – Your earnest money is paid to an escrow account, which is then paid toward your mortgage when you close. You do have to give it upfront though. This fee is typically around 1% of the sales price. If you are buying a $200,000 home, then you should think about giving $2,000 in earnest money.
Down Payment – This is going to be the biggest expense. You should see if you can afford to make a 20% down payment on the home. If you can’t then you will have to pay PMI (private mortgage insurance) until you have 20% equity in the home. If you have a down payment, then the lender knows you are serious about buying the home and your financials can support the home purchase.
Home Appraisal – The lender requires a home appraisal. This shows the home price is justified by the value. Appraisal costs differ by region, but it can average around $450. This fee comes back to you in the form of a credit at closing.
Home Inspection – Some lenders require a home inspection, while others do not. A home inspection is recommended as it can uncover potential issues with the home. Having one done by a licensed inspector can also give you the ability to request repairs from the sellers. Inspection fees vary by region and services provided. They also range based on square footage. A typical fee might start at $350, but others services will add to the price, such as tests for radon , water quality, asbestos, lead, septic systems, and more. These tests can be pricey.
Additional Inspections – If your regular inspector uncovers some issues, they may tell you to call a licensed specialist. If you have plumbing issues, then a licensed plumber should come out and look at the issue. While you can ask the sellers to pay for these extra inspections, they are not required to do so.
Closing Costs – Most lenders have a cost to process your loan. These are called closing costs. You can try to get the seller to pay for them, but if you can’t, then you have to come up with them. They can range from $1,500 to $4,000 and they need to come with you to closing.
Wire Transfer Fees – When you need to pay for closing costs, most title or attorney offices like to get wire transfers. These cost money, averaging around $25. It might not be much, but it does cost money.
Moving Supplies – Moving is expensive. It costs money to pack your items up. If you don’t have a way to get free boxes, then you will need to pay for them, along with tape and packing materials. Depending on how much you need to pack, these supplies can be costly.
Moving Truck/Hiring Movers – Hiring movers is going to cost money. They are not cheap and sometimes you get what you pay for. If you want to move yourself, then you will probably need to rent a truck. These are available from places like U-haul. You should compare the costs along with time involved to deal with moving and add up how much these two options will take.
Repairs/Painting – Once you move into your new home, you will probably want to make some changes. From painting, replacing floors, and doing minor repair work, these all cost money. Paint can be very expensive depending on the size of the home and who much you actually want to paint. If you have to make repairs, can they be done on your own? Do you need to hire a professional? These move in expenses can add up to quite a lot.
As you can see, there are a lot of costs associated with buying a home. These can lead to thousands and thousands of dollars, which you need to come up with in order to close on a new home. If you don’t properly budget for these items and any unforeseen ones, then you could have a hard time paying for the transaction.
Make Your Budget First
You should take time in the beginning to put together a detailed home buying budget. Call around to get mortgage quotes and ask how much they charge for closing on a loan. You should also ask how much it costs to pull your credit and get a home appraised. You don’t need to have a home picked out yet, as they probably charge a flat fee.
The items listed above should be included in your budget. Check around your area to see what the range of prices are. Shop around and then put the average in your budget. You should also include a miscellaneous category, which can help you cover unexpected costs that arise. There will probably be costs involved which I didn’t cover, but that is due to so many different loan types.
So before you jump feet first into the home buying process, make sure you can afford to get involved. A lot of money will be moving hands, so you should always make sure you have enough to cover it, along with extra to keep you financially secure. If you can’t pay for these cost, then home buying might not be for you at this moment. Wait until you can easily cover the related costs and it will make the process much smoother.
How about you all? What was the first step you took when taking the plunge on buying a home? Did you first look at houses from a personal perspective, or did you first consider the finances?
Share your experiences by commenting below!
***Photo courtesy of https://www.flickr.com/photos/86530412@N02/7932571974/sizes/l
The First Step You Need to Take When Buying a Home is a post from: My Personal Finance Journey
