Considering Buying a Home? Here Are The True Costs Most First-Time Home Buyers Don’t Realize

Thinking about buying a home for the first time? Beyond the down payment there are a few other expenses to consider to help you accurately assess the cost of the home you’re thinking of purchasing.

Costs that arrive before closing

From deposits to inspection report fees, appraisal costs, insurance quotes and association applications, some of the fees to complete the transaction are paid before closing. Some of these are credited at closing and some are just costs of hiring someone to provide a service. Some will be incurred whether the sale completes or not.

There are due dates associated with these charges, and the dates can be surprisingly soon, such as three days after acceptance. Make sure you’re aware of all of them.

The monthly payment is more than principal and interest

Monthly property expense includes mortgage principal and interest, property taxes, homeowners insurance, flood insurance if applicable, mortgage insurance if applicable, and HOA dues if applicable. Get all of those numbers before making an offer. Be aware that seller-provided property tax bills won’t accurately predict your property tax expense, nor will their homeowners insurance rates predict your premium.

Your house will be reassessed, they may have had exemptions or credits that don’t apply to you, their insurer may not be your insurer, their claims history affects their rate but not necessarily your rate, etc. Online calculators can help you make an initial determination of affordability, but don’t rely on them. They won’t have your area’s property tax quirks built into them, they won’t be able to call an insurance company to get a quote, they have no idea what an HOA budget looks like.

Get real numbers to make informed decisions.

The Loan Estimate breaks down what is due at closing

This document from your lender itemizes their fees, the title and closing agents’ fees, recording fees, taxes, interest, insurance premiums, and other miscellaneous costs. It shows the amount you’ll be required to escrow for taxes and insurance. Make sure you review it in detail and ask your lender or closing agent questions if you’re unsure of any of the charges.

Keep in mind that if there are any changes to the closing date, purchase price, seller-provided credits, loan amount or loan program, the amount of cash needed to close will be impacted. Always double-check with your closing agent for an up-to-date amount.

Renovation is a cost and a calendar

Buying a fixer-upper? Beyond the cost of materials and labor there are permit fees, unforeseen issues (structural, plumbing, electrical), fluctuating material costs, HOA approvals for color choices or design changes, and, depending on the scope of the project, maybe temporary living expenses if the house becomes uninhabitable at some point. Get bids, budget accordingly, and leave room in your pocket for surprise projects.

The first year needs its own reserve

From rekeying the locks to drapes, paint, tools, utility deposits, appliances, etc. there are expenses that will need to happen right away that are easy to forget about. Unexpected repairs will come up, too. A furnace that dies in the dead of winter, a dishwasher that starts leaking, a refrigerator that quits cooling.

There’s no way to plan for those, but hopefully you’ll have some extra money tucked away to address them without putting them on a credit card. It’s a lot more comfortable to walk into closing and not spend every last dime you have. That leaves room in your budget for unexpected projects in the first year of ownership.

Moving costs depend on how much help you buy

Whether you’re hiring a team of professionals to pack up everything you own, loading it all up, driving it, unloading it all, unpacking and hauling the boxes of packing supplies to the recycling center, or whether you’ll rent a truck or container, have friends come help you load it, drive it yourself, unload it yourself, then hire some muscle to carry everything up the stairs, will determine how much of a budget you need.

A first-time buyer’s working budget

Down payment, though remember there are some homes you can buy with little down Cash to close, from your loan estimate Moving costs Projects to spruce up the house, make it livable, get the appliances you’re dreaming about Repairs you’ll be surprised to discover after you’ve moved in, such as an old roof, electrical panel replacement, or sewer line replacement

Costs that do not look like closing costs

Homeownership is a huge undertaking. There are so many professionals that help facilitate the sale of a home. Knowing what they are and what they cost ahead of time only heightens the excitement of your purchase.

Use property-specific monthly numbers

Your lender will itemize monthly and yearly amounts for taxes and insurance to be escrowed and closing costs including loan charges. The latter include appraisal and inspection charges. The good news is that all of those costs are calculable before you offer.

Online calculators can get you within striking distance but you want specifics from a mortgage loan officer. The deposit, inspections, appraisal, other charges, loan/closing costs, insurance, association charges, taxes, utilities, repairs, furnishings, moving are all critical line items to include in your working budget. If you’ve been renting, some utilities and maintenance charges will be new to you.

Budget for those.

Add a cushion for the work

Your inspector, contractors, your knowledge and common sense can help you with the scope and cost of immediate repairs. There are plenty of resources to plan a project including timelines and permits. Budget for immediate and expected items and try to leave some cushion for unknowns.

Watch the first tax, insurance, and association notices

Taxes, insurance, association dues and budgeted maintenance are the big ticket items to watch. Your first notices and statements are important. They will help you budget the following year and prepare for changes to escrow at your annual reconciliation with the lender.

Keep them. Association budgets can be obtained before closing. Your agent should ask for the latest budget.

There may be a cost to join. Review the rules and regulations. Budget for dues, reserves, special projects.

Budget the building rules as well as the truck

Budget for boxes, trucks, gas, storage, tips, travel. Condominium buildings often charge a deposit, have specific hours, require elevator reservations and certificates of insurance from the moving company. Other buildings have parking restrictions.

Declutter before you move. You’ll be surprised how much stuff you thought you needed will leave. Don’t bring boxes of stuff into your house that you do not want to keep.

It will haunt you.

Do not overlook the lifestyle costs

These are easy to overlook. They include meals out if there’s no way to eat there, child/pet care for showings/inspection, temporary storage, time off work. Budget accordingly.

Your lifestyle can change monthly costs. Commute time and transportation expenses like gas and tolls change with relocation. So does yard care like watering, landscaping, pest control.

Pools, security systems are added costs. In a condominium, learn what utilities/services are paid by association dues. That information will help you budget for increased/decreased utilities.

Insurance in Florida deserves its own line

Another area of concern in Florida that can catch people by surprise (particularly first time buyers), is homeowners insurance. This is not a small expense. Make sure you get a handle on what kind of insurance premiums the house you’re looking at would cost. Rates can be greatly affected by the age and material of the roof, material the house is built of, closeness to water, previous claims on the property, etc. I highly suggest getting a sense of insurance premiums for the home before making an offer. Ask what kinds of inspections may need to happen before an insurance company would cover the house.

Once you get insurance quotes (based on your address), take some time to make sure you understand all of your coverage options and deductibles. Hurricane deductibles are often taken out of the entire coverage amount, meaning they are typically much higher than your standard deductibles. Ask your insurance agent to go over flood insurance (another separate policy your lender may require, depending on the flood zone the house is in) and wind insurance (could be separate as well, depending on the insurance company/plan). Make sure you understand all of it before you settle into your new home. You want to leave nothing to chance here. The last thing you want to hear after you finally feel cozy and safe in your new place is a nasty insurance surprise.

Another thing to consider here, insurance will go into your monthly escrow (like taxes), which affects your monthly payment. People get caught up in the annual insurance payment amount, and do not realize how much it affects them month to month. Florida insurance can be pricey, so it is important to get an idea of premiums early on before they blow up your budget.

Utilities you may never have paid before

Utility costs can often catch people off guard. Many landlords will pay some utilities for their tenants and roll it into the one payment a month. So when people become home owners, all of a sudden they have lots of bills.

If it’s a house you need to budget for water/sewer, trash, electric, internet and possibly gas. Also some people pay for lawn care/pest control. If it’s a condo most association dues will include water/trash but probably not electric. Either way it’s always best for you as a buyer to ask the seller for past bills for a year, or you can call the utilities and ask them for the average utilities on a certain address. I always suggest this to buyers before we go under contract with the home. Especially electric can surprise people here in South Florida because in the summer it’s so hot our air conditioners are on all day long, which in return gives us that nasty surprise electric bill in the summer.

Many times people are not prepared for all these bills because they aren’t used to paying them, especially if you’ve always rolled some into your rent payment. Also in the first month there are deposits to open all these accounts and start up fees and they all add up really quick. So get those numbers ahead of time and have an idea of what you’re looking at to help you budget.

Furnishing a first home without a credit card

I always tell my buyers to not purchase furniture until after your loan has been finalized. Until it is disbursed the lenders are still keeping a watchful eye on your debt-to-income ratio and purchasing anything on credit can put your loan at risk. After your purchase is complete you might still be tempted to purchase furniture with credit but I would suggest holding off. Your cash reserves (savings for home maintenance and repairs) may be zeroed out without you realizing it and who wants to find a burst pipe only to have no savings to fix it?

Often times after closing buyers are tempted to run out and purchase all sorts of things for each of the rooms. It seems easiest to charge it all on the credit cards. My suggestion is live with what you have in the home for a month and get a feel of the space. You may be surprised how well the space works for you. I always tell buyers buy the functional items first: a bed, window coverings (for privacy), table and any missing appliances. Then look for sales, shop for used furniture or consider floor models. Those other necessities that you feel you are missing can most likely be had without breaking the bank. Enjoy your home, take your time, let the home adjust to you. An empty room for a few months won’t break your budget or peace of mind.

A fuller first-time buyer’s working budget

It includes down payment, deposit, inspection, appraisal, loan/closing costs, association application/dues/reserves/special assessments, prepaid property taxes, homeowners insurance, pets/child care during inspection, gas/tolls/transportation changes, association dues/services, yard care/pest control/security system, immediate needs like appliances, window treatments, locks, smoke alarms, known repairs, furniture, moving, remaining reserves. Your lender, insurer, association, inspector, contractors can help you figure these costs. Once you’ve crunched those numbers, try playing with one at a time to see how much wiggle room you have.

What if insurance is more than you think, association dues go up, repairs are necessary, seller’s credits are limited? It’s important to make sure you can absorb the ordinary surprises of home ownership. It’s nice to have remaining cash to invest.

It makes us feel safe and secure. It’s a thrill to spend it all and buy furniture too but it’s nice to have reserves. Knowing what to expect helps you prepare and won’t take away from the thrill of home ownership.

It will help you be able to relax and enjoy your accomplishment.

Immediate needs come before nice-to-haves

Smoke alarms, locks, appliances, window treatments are functional. Furniture is lovely but wait until you’ve spent some time in the house to buy. You’ll be surprised how much space there actually is and what kind of traffic there is in a room.

Those facts can save you lots of money.