Buying a house is a big decision.
But while buying a new home can be exciting, make sure you're not considering location, location, location over the budget, budget, budget.
In general, you should save 20% of the cost of the home for a down payment and plan for the monthly payment to total no more than 25%–30% of your monthly take-home pay. If you follow GuideStone's 50/20/30 rule for household budgeting, your monthly mortgage payment should fit neatly within the 50% category:
(Tip: As you prepare to purchase, generate a payment schedule with this loan calculator. It will give you a quick snapshot of principal payments, which include property taxes and home insurance.)
Even if you have these basics covered, there are several other costs you may need to review. Check out our list of eight additional costs* to consider when purchasing a home.
1. Appraisal fee — This fee is for a qualified appraiser to estimate their opinion of the value of a property for the lender. This can be either a fixed fee or based on a percentage of the estimated value. We recommend you plan to spend between $400 and $600, on average.
2. Closing costs — Closing costs are all of the fees for services related to a sale — such as up-front hazard insurance premiums, property taxes prorations, document preparation fees, attorney fees, filing fees and escrow fees. Closing costs are fees paid at the closing of a real estate transaction when the buyer receives the title to the property. Either the buyer or the seller can incur these costs, which can total up to several thousand dollars.
3. Earnest money — This is the deposit you need to confirm your contract. Earnest money is the escrow deposit with the title company. Typically, it's around 1% of the sales price. You can pay an option fee, which allows you to retract the real estate contract within the legal time frame and not lose your earnest money. You do, however, lose the option fee.
4. Home inspection fee — The fee for a licensed property inspector to determine the current physical condition of the property varies but can often amount to several hundred dollars. This fee is not to be confused with the home appraisal, which determines the property value.
5. Homeowners' association (HOA) fees — Not all neighborhoods offer an HOA, but if your potential neighborhood does, these fees will be used to care for the general upkeep of shared property and amenities. These fees are payable at the time of closing, and the mortgage lender will work directly with the HOA to obtain their financial records needed for underwriting.
a. You should know how much money the HOA has in reserves before you close on the sale. For example, if HOA dues collected annually are $100,000, the HOA should ideally have 30%, or $30,000, in reserves after approved expenses. If the HOA does not have 30% and needs to complete a major repair, they can place a special assessment on all of the homeowners. This assessment is mandatory and for the length of time deemed by the HOA board.
b. Another financial note about HOAs is it's customary for them to raise dues by 5% every year. If the neighborhood you are interested in has an HOA, ask the mortgage lender when the rates were most recently raised.
6. Homeowner's insurance — This insurance covers both the property and its contents. Homeowner's insurance is mandatory, and you won't be able to get a mortgage without it. Additionally, the standard insurance may not cover natural disasters such as floods, tornadoes and earthquakes. Depending on where you live, you may want to consider taking out additional insurance to cover such risks. This cost is also paid at closing.
7. Private mortgage insurance (PMI) — Additional required insurance if you put down less than 20% of the home purchase price. PMI is standard and fees vary as it protects the lender in case you default. The rules are complicated, but usually once you have paid the mortgage down and you owe less than 78% of the appraised value of the house, you can drop the PMI payments.
8. Title insurance — Title insurance protects you (and the lender) if it is later discovered that someone else could lay claim to the title, and therefore ownership, of the house. This cost is paid at closing.
As you consider buying a home, make sure that you're saving not just for your down payment but also for the additional fees and expenses that pop up along the way.
If you have any further questions regarding what you can afford when it comes to buying a house, do some quick calculations on our Rent vs. Buy calculator.
*This information is provided for budgeting purposes only and is not an exhaustive list of all fees. Fees for services vary by region, bank and service provider.
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