Budgeting For a New Home
This article was originally published by moneyfit.org and republished with permission.
Buying a new home? What a milestone! No more rental money going into someone else’s pocket; no more wondering how long until the landlord sells your place. Getting the keys to a first, fully owned property is a special moment and one to treasure.
But whether a first or fifth property, rules, and regulations - not to mention the cost involved - can make the process difficult to navigate. That asking price the seller came up with is just the tip of the iceberg. From taxes to insurance, you’ll need to save plenty of money.
This article will serve as your complete guide to budgeting for a new home.
The 31% Rule
According to the Federal Housing Administration, when looking to buy a property, consider mortgage payments that equate to 31% of your gross monthly salary. While this gives a great starting point to figure out your new home’s affordability, in terms of monthly mortgage payments, you will need to take other costs into consideration before, during, and after the buying process.
Financial trends come and go but these costs factor across the property buying process fairly universally.
Earnest Money
This cost gets overlooked but should turn up in your homebuying calculations. It effectively means parting with cash before even signing the paperwork. It works like this:
A buyer’s earnest money shows the seller how much the buyer wants to go through with the purchase. While the seller returns this money upon the sale’s completion, it can put a serious dent in a tight budget upfront during the process.
The required amount of earnest money can vary widely, but you should expect to pay somewhere between $1,000 and $5,000. Make sure to factor this amount into your budget as a common cost in the house-buying process.
Down Payment
You will nearly always need to place a down payment to secure a mortgage. Different lenders and different loan programs have different requirements but down payments typically max out somewhere around 20% of the sales price.
When struggling to come up with a 20% down payment, you might consider two key options: 1) Wait and save more (which in the long run might have the smallest impact on your finances) or 2) take out Private Mortgage Insurance (PMI) on your loan.
PMI effectively protects the mortgage lender against your potential default on the loan repayment. It adds an additional cost to your annual repayments that can range from just over 0.5% to nearly 2% of the total loan.
Of course, when it comes to your down payment, the more you put down at the front of the loan, the less you will owe over time and the less interest you will pay, making the home purchase a better deal in the long run.
Closing Costs
Many homebuyers tend to overlook or seriously underestimate closing costs. According to a 2019 survey, US homeowners pay an average of $5,749 in closing costs. Obviously, this can seriously impact the homebuyer’s budget, so you would do better to over-estimate rather than under-estimate these costs.
A typical breakdown of what closing costs include might look like this:
Escrow fee (or closing fee)
Credit report fee
Application fee
Attorney fee
Courier fee
Mortgage Insurance Premium
Homeowners’ insurance
Property appraisal fee
A great deal more fees can make their way into closing costs depending on the state or county where the property is located.
Junk Fees
This contentious issue boils down to unnecessary costs. Buyers should challenge these fees even though many don’t. This list contains several examples and gives guidance on how you can push back.
While not illegal, junk fees do not fall into best practice guidelines. They can include items such as a “document preparation fee” or “job verification fee.”
A lot of regulatory work goes into streamlining the buying process, making it as affordable as possible for buyers, and clamping down on the number of unnecessary fees, but junk fees still exist.
As a buyer, you have the right to challenge any fees found in the small print that seems excessive. The very best way to completely avoid extra fees involves doing as much research as possible. Of course, when at the seller’s mercy, this is not always easy. Still, feel free to challenge costs that seem outside the norm or otherwise unnecessary.
Moving Costs
As far as moving costs go, keep in mind the good news that you, as the buyer, have a large measure of control over them. If you want to go all-in and get our possessions wrapped, moved, and unwrapped by the moving company? Great. It will mean paying a higher price but will definitely save sweat and time.
On the other hand, if you want to make that move happen independently, rent a truck, and rope in a few friends to help, you will save a lot of money. Plus, you’ll find out who your real friends are!
Finally, consider the middle option. Find a moving team to pack up and transport your household items but who don’t offer a luxury service. You might just need a few extra hands-on moving day along with a larger truck to minimize the cost of your upcoming move.
Depending on whether you move just across town or internationally, you need to factor in the cost of the mover’s fuel and time as well as other moving expenses like pet care or furniture and appliance replacement.
Property Taxes
Your mortgage lender might factor this cost into the total loan. When this happens, that figure seems almost irrelevant as you look at your spending over the next few decades as you repay a figure with a frightening amount of zeros.
On the other hand, some loans exclude your new property tax, meaning you’ll be stung at the end of each year of ownership by these expenses. Why? This can happen when the county considers your new house undervalued at the time of sale. The burden of making up the difference then falls to the homebuyer.
In reality, his is unlikely to happen, but getting a birds’ eye view of what similar properties sell for in the area is worth an hour spent Googling.
School Taxes
School districts raise a large portion of their funding through property taxes. If you don’t have children, you may not even consider this expense. This cost can vary widely depending on where your new home is within the country.
Some buyers may not mind paying a higher school tax rate, especially they choose to move to a specific area because of the good schools. However, others may see the extra cost as a burden. In such cases, it can help to remember that neighborhood schools greatly contribute to the quality of life the area offers, even if you don’t have students in your home.
Utilities
Finally, you should consider the cost of utilities at your new home. While you will have the obvious expense of month-to-month costs like electricity, sewer, trash, water, and heating, you might find an unwelcome surprise in the setup fees. Some providers ask for a one-time payment while others might add it to your first bill.
Needless to say, you should shop around and do plenty of research. Use comparison sites to get the best deals while considering services that effortlessly change your account over to the cheapest provider with no hassle.
Finally, you will want to consider the cost of utilities at your current home and property compared to the new place. If the new property is bigger, you’ll want to ensure it has adequate insulation and a heating and air conditioning system in good condition.
All these considerations will help you budget for your new life in your new home.
Final Thoughts
Buying a house can seem daunting, especially for first-time homeowners. It looks like a complicated chain of difficult decisions. Take heart, though. Every buyer goes through a similar process to one extent or another, and you can find plenty of support among friends, family, and online communities.
Take your time, and don’t let yourself get rushed into spending what’s arguably the largest amount of money you’ll ever invest. Research the new community and check out neighborhood groups on social media to get an idea of the advantages and disadvantages of each location under your consideration.
For potential buyers struggling to secure a mortgage at all and wondering how to get there, take into account your credit scores. If your credit rating needs attention, spend some time improving it, since a higher score could potentially save you thousands of dollars in interest over the long term.
Pay off or pay down your debt, check to make sure all your credit information is accurate, and ensure accounts listed on your credit report belong to you and not to some identity thief. Lastly, make sure to pay all your bills on time for as long as period as possible. Even a single late payment can drop your credit score for up to seven years.
When it comes to your credit record, you want it to portray you as a responsible borrower, someone who can manage debt, and someone who does not miss payments. It might take time to build such a history on your credit report, but mortgage lenders do take it into account and offer far better terms to borrowers with a great credit score.
The home buying process can take a long while and can take the potential homebuyer through many emotions. It can turn into a financial drain in many ways. However, the day you find yourself surrounded by crates and furniture after a day of moving into a new place, you’ll experience the excitement that only becoming a new homeowner can create.