What's The Real Cost Of Buying A Home?
*As of July 6, 2020, Quicken Loans is no longer accepting USDA loan applications.
There are a lot of great reasons to buy a home including the fact that you own it and can benefit from the investment rather than giving your money to a landlord. It’s also your space to make your own, meaning if you want a custom toilet seat that’s purple with pink polka dots, no one can stop you from making it happen. In many areas across the country, owning your home can end up even being cheaper than renting.
Still, we’d be lying if we didn’t acknowledge that buying a home can be a significant investment both up front and over time. If you’re considering taking the financial plunge into homeownership, here are the costs you should expect going into the process.
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Costs You Might Be Expecting
When it comes to the cost of buying a home, there may be certain costs you already know you can expect. Even if you think this is a given, it all factors into your total cost, so we want to make sure we touch on these before moving on.
The most significant upfront cost involved with most mortgage loans is the down payment. It can be a real barrier to entry into the housing market because people tend to feel like they need to save for a number of years.
A big reason for this belief is that traditional wisdom dictates you need a 20% down payment. While there are many advantages to a larger down payment, the idea that a 20% down payment is necessary has now been relegated to a myth of the past. You can get a conventional loan with as little as 3% down and an FHA loan with just 3.5% down up front.
A USDA loan is available for people getting a home in eligible areas that are either rural or potentially on the edge of suburbia. If you make less than 115% of the area’s median income, you may be able to get a loan without a down payment.
Finally, VA loans offer a 0% down payment option for eligible active-duty servicemembers or reservists, veterans and surviving spouses of those who have passed in the line of duty or as a result of a service-connected disability.
Monthly Mortgage Payment
Your monthly mortgage payment is the other obvious cost of buying a home. It’s broken down into five parts that you can remember with the acronym PITIA:
- Principal: This is the portion of your payment that goes toward actually paying down the balance of your mortgage loan every month.
- Interest: This is the fee charged by the lender to give you the loan. Both your principal and interest are amortized to be fully paid off over the term of the loan. At the beginning you pay more toward interest than principal, but this flips as the years go by until your payment is almost entirely toward the principal by the end.
- Property Taxes: The T in PITIA is for real estate taxes. These are administered by your county or another local taxing authority and can fluctuate based on changes in your property value.
- Homeowners Insurance: Your homeowners insurance covers the cost of repairing or rebuilding their home in the event of damage. Typically, there’s also personal property protection and liability coverage for things that happen on your property. Often your property taxes and the insurance are paid out of an escrow account where your lender splits the homeowners insurance premium and property taxes into monthly payments. This way, you don’t have to pay it all in one big check.
- Association Dues: This doesn’t apply to every situation, but it’s important to know about if the neighborhood or condo complex you buy in has an association. In that case, you’ll have to pay monthly or annual dues. Although this isn’t something that’s typically put in your escrow account, it’s included in your monthly mortgage payment when the lender determines how much of a loan you can qualify for.
Unexpected Home Buying Costs
People expect to have a down payment and monthly mortgage payment, but they may not know about other costs associated with buying a home. The rest of this post will cover what you need to know so there are no surprises when you get your closing disclosure.
Real Estate Agent Commission
Neither you nor the seller technically have to work with a real estate agent, but it’s a good idea for both parties to have an agent representing them. The reasoning here is that neither you nor the seller buy or sell homes every day. A good real estate agent is hitting the pavement every day in your area and really understands the real estate market there.
As a buyer, having a real estate agent in your corner can be particularly helpful because they can pull comparable properties for you. This will give you a better idea of what you can expect to pay for any homes you’re working at putting in an offer on. They’ll also know exactly how competitive the market is in your area and when it might make more sense to go a little higher with your offer or when it might be necessary to waive certain contingencies.
Real estate agents are typically paid on commission, which they split evenly. Typical commission is between 5% – 6% of the purchase price, according to the National Association of REALTORS®. Typically this cost is paid by the seller, but it doesn’t always have to be and in that case you could agree on some other arrangement.
Earnest Money Deposit (EMD)
Once you have your offer accepted by a seller, they take their property off the market to give you time to do the things that need to be done to finalize your mortgage including getting an appraisal and underwriting. This also gives you a timeframe to get a home inspection completed.
The seller is taking a risk at this point as well. Not every mortgage loan closes even if you’ve been previously approved for the amount you can afford. For instance, the appraisal could come in low and you might not be able to come to an agreement on new terms. As compensation for taking the time to go through the process with you, the seller is given an earnest money deposit. This is meant to show the seller that you’re serious about your offer and want to see it through.
The earnest money deposit is usually some percentage of the overall purchase price. The exact amount you’ll have to give a seller depends on the convention in your area. This money goes into escrow and is applied to your down payment if and when your loan closes. If for some reason the transaction doesn’t go through, the seller keeps the deposit unless your offer was contingent on a specific appraisal amount or had home inspection contingencies.
Lenders charge a fee to get your loan set up and do the underwriting and verification work. This fee is typically somewhere between 0.5% – 1% of the loan amount. This is one of the things you can take into consideration when you shop for lenders. Let’s explain what we mean.
If you shop for a mortgage or any loan, you’ll see two rates: There is the smaller base interest rate and then a higher one called an annual percentage rate (APR). The APR takes into account both the base interest rate and the lender’s costs for setting up the loan. The bigger the difference between the base rate and the APR, the more the lender charges you for financing.
When shopping for a loan using this interest rate trick, there are a couple of things to keep in mind. First, you’ll want to make sure you’re comparing apples to apples. So if you’re looking at 15-year FHA loans at one lender, be sure you’re looking at 15-year FHA loans at any other lenders you might be comparing.
Secondly, there could be a situation in which you were willing to take a slightly higher APR rate. This might happen if the lender was giving you a credit to keep your closing costs down in exchange for a slightly higher rate. In this case, you’re essentially building your closing costs into the loan over the full term rather than paying them all out of pocket up front.
According to one estimate by ValuePenguin, the total cost of title insurance if you get both the lender’s title policy and the owner’s policy is $1,374. Let’s break down title insurance briefly and explain what each of these policies represent.
When you take the title and deed of a home, you own that property. However, what happens if someone else holds a claim to the ownership of that property, possibly unknown to the current owner and definitely unknown to you as the buyer? If this happens, you could lose the property and your lender could end up losing the loan.
When you buy title insurance, you’re paying someone to do a search of public records and various documentation services to be aware of whether someone besides the seller has a claim to the property. You’re also paying them for the insurance policy in case someone makes a mistake and 5 years down the line a long-lost relative says that they have a claim to the property.
There are two types of title insurance: a lender’s title policy and an owner’s title policy.
A lender’s title policy is the cheaper of the two, and it’s the one you’re required to get as a condition of getting a mortgage. It protects the lender from losing the cost of the loan if you lose the house in a future title dispute.
You can also get an owner’s title policy that will protect you should someone be found to have a valid claim to your property in the future. With this policy you could make an insurance claim that would help you buy another home.
The cost of title insurance can vary based on the location of the property as well as the risk factors associated with the loan including your credit score and the size of your down payment.
When you apply for a loan, your lender pulls your credit to get a look at your score as well as your debt-to-income ratio (DTI). The cost for pulling your credit is built into your loan costs. This typically is a charge of less than $30.
If you want to see what your credit looks like or where you can improve before getting too far into the loan process, a Rocket HQSM account will give you access to your free VantageScore 3.0® credit score and report from TransUnion® every week. There are additional features including a score simulator where you can see how different financial moves will impact your credit score.
Because it’s not related to a loan or credit account, viewing your credit with Rocket HQSM is considered a soft pull and won’t negatively impact your score in any way.
If you’re buying a home, you’ll need to have it appraised. In an appraisal, a professional comes out and looks at two things:
The first responsibility of the appraiser is to determine whether the property is in livable condition and if someone could move into it. Are the water and electricity working? Are there any exposed studs or holes in the roof? Are there any missing deck rails? If there’s anything wrong, repairs need to be completed before the mortgage can move forward.
The second and more familiar duty of an appraiser is to give your property a value, the purpose of which is get the actual property value based on comparable sales in the area. This is important because lenders can’t give you more than the home is worth since the property serves as the collateral for your loan. An appraisal also has the secondary benefit of at least letting you make an informed decision on whether you’re going to pay above market value. If you can’t come to terms on a new price after the appraisal, you can either walk away from the property or make up the difference between the loan amount and the purchase price by cutting a check at closing.
The cost of an appraisal can vary depending on the size of the house as well as the area you’re located in. The average price for an appraisal according to HomeAdvisor is anywhere between $300 – $400. If a survey is necessary, that could add to the cost.
If you work with Quicken Loans®, the cost of your appraisal and credit report are included in your deposit when you decide to move forward. If the appraisal ends up costing more, the difference would be paid at closing.
Although it’s not required to get a loan, it’s always a good idea to get a home inspectionwhen you’re buying a home. During an inspection, someone will go through the house with you and they’ll point out anything they see that might need to be corrected now or in the future. This is a great opportunity to ask questions about your new home. It could also help you get out of a home that has major issues before you get too far along in the process. Just be aware that if the inspection uncovers certain issues, you could have a hard time getting your deposit back unless you have an inspection contingency that allows you to get it back.
A typical home inspection might cost anywhere between $300 – $500, but it will vary with the size of the home as well as what’s involved in the inspection itself. There are also specialized inspections for things like septic systems, radon and chimneys among other items that are typically separate from a general inspection.
If you put less than 20% down on a conventional loan, you’ll have to pay for mortgage insurance in one way or another. There are a couple of different types of conventional mortgage insurance: borrower-paid and lender-paid.
Most conventional mortgage insurance options don’t impact your closing cost, but there is an option to pay off borrower-paid mortgage insurance (BPMI) at closing so you don’t have a higher monthly payment. The cost to pay off the policy will depend on things like your down payment size and credit score among other factors.
FHA loans typically have mortgage insurance for the term of the loan or until you refi. If you make a down payment of 10% or more, you’ll only have to pay monthly premiums for 11 years. However, there is an upfront premium on all FHA loans that’s currently 1.75% of the loan amount. If you don’t want to pay this at closing, it can be added on to the loan balance.
USDA loans have an upfront guarantee fee of 1% of the loan amount along with monthly guarantee fees for the life of the loan that function just like mortgage insurance. The upfront guarantee fee can be built into the loan.
With a VA loan there’s no mortgage insurance. That said, there is a VA funding fee that varies depending upon your service status as well as your down payment and the number of times you’ve used a VA loan. It’s paid at closing, but if you can’t afford to pay at close, it can be built into the loan amount. Disabled veterans, eligible surviving spouses and Purple Heart recipients serving in an active-duty capacity are exempt from this funding fee.
When it comes to making your purchase an official record, your deed is recorded with the county. There’s typically a fee for this paid by the buyer, but the amount can vary greatly depending on where you buy your new home.
There are other fees that may be charged including a deed preparation fee and a tax for transferring the property that’s typically around 1% of the purchase price. These are usually paid by the seller, but everything is negotiable.
Finally, there’s a cost to having a notary present to oversee the signing of the paperwork and the actual closing of your loan. In some states, fees may be higher because sometimes an attorney is required to handle closing.
Mortgage Discount Points
If you look at lenders’ rates, they may have a certain number of points that they list in their disclosures. Mortgage discount points are prepaid in order to get a lower interest rate. One mortgage point is equal to 1% of the loan amount, so 1% on a $200,000 loan is $2,000. You can buy points in increments all the way down to 0.125% of your loan. When it comes to points, it’s really about doing the math.
If paying for one point on a $200,000 ($2,000) loan will save you $50 per month, you would have to stay in your home for at least 3 years and 4 months ($2,000/$50 = 40 months) to break even. After that, you make money on the deal.
When you’re comparing rates between lenders, make sure that you’re looking at comparable numbers of points as well to see the difference in the charges. If you do choose to pay for points, these are paid at closing.
Setting Up Escrow
When you first start your loan, you have to prepay a certain amount for taxes and insurance. When you set up your mortgage, you’ll want to make sure you have at least 2 months’ worth of your monthly tax payments in your account. By doing so, there’s a cushion in your account at all times because property taxes do go up as home values rise.
Property taxes can vary greatly based on property values in your area. You may be able to get an estimate of what your taxes would be based on the previous homeowner’s experience. However, be aware that the final number may not match exactly depending on what exemptions you qualify for.
Most lenders require you to prepay for up to the first year of homeowners insurance. You’ll be required to have homeowners insurance when you get a mortgage because the house is collateral for the mortgage and the lender has to protect their side of the investment as well. It’s also worth noting that if you live in a floodplain or an area prone to hurricanes or other strong storms, you’d be required to have flood insurance as well.
An escrow analysis is conducted each year to make sure that the correct amount is being put into your escrow account each month for taxes and homeowners insurance. If you’re short, you’ll have options to make up the difference. However, if there’s more money than necessary in your account, you’ll get a check from your mortgage servicer.
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Cutting Down On Closing Costs
We just went through a ton of different closing costs that may apply when you buy a home. It may all seem a bit overwhelming. The good news is that there are ways to keep your closing costs at bay.
You and the sellers can agree that the seller will pay a certain amount of your closing costs. This works best if the seller is motivated to sell the home quickly. If there are other offers on the table from interested buyers, this may not work. However, in the right situation, it could be a good option. A seller contribution can be made for any closing costs including:
- Attorney fees
- Title insurance
- Fees for use of a real estate tax service
- Interest rate buydowns
There are limits to how much you can have the sellers pay for. These limits vary depending on the type of loan you’re getting. All of the following numbers assume you’re buying a primary residence.
For conventional loans from Fannie Mae or Freddie Mac, they break things down based on your down payment. If it’s 10% or less, the limit is 3%. Meanwhile, if your down payment is less than 25% but more than 10%, the limit for seller concessions is 6%. Finally, if the down payment is 25% or higher, sellers can contribute up to 9% toward closing costs.
If it’s a VA loan, there’s no limit to the amount of seller’s concessions for things like discount points, surveys and appraisals, origination costs and credit report fees. There is a limit to the amount that can be contributed for prepayment of escrow and the funding fee. That limit is 4% of the purchase price or appraised value, whichever is lower.
The FHA and USDA are the most straightforward in terms of their seller concessions policy. Sellers can contribute up to 6% of the loan amount toward closing costs.
If the appraisal comes in higher than your purchase price, you can use another tactic to cut down on closing costs. You can offer to give the seller more money if they’ll cover certain costs at closing for you. This way, you’ll finance your closing costs into the loan.
If your appraisal doesn’t come in higher than your offer, there’s another way to finance your closing costs into the loan. You can ask your lender which of the costs might be able to be covered by a lender credit.
A lender credit is utilized when you agree to take a slightly higher mortgage interest rate in exchange for not having to pay as much in closing cost. You can think of it as the reverse of discount points. You’re paying a little more money over time to pay less money up front.
Once you own a home, there’s no landlord to call when something goes wrong. It’s now on you to fix the furnace when it breaks. With that said, you don’t have to panic. You may go years without having anything that needs to be replaced or repaired, and then in a single year you might need a new HVAC system as well as a new refrigerator.
Because the nature of home expenses can be sporadic, accumulating savings over time can help. Experts recommend saving at least 1% of the purchase price of the home per year for maintenance. As opposed to a percentage, some people spend $1 per year per square foot. So if you had an 1,800 square foot home, you would budget $1,800.
Factors that might cause you to up this budget a bit include the age of the home if it’s on the older side. Also consider the weather in your area, the house’s exposure to hazardous conditions and the shape it’s in when you buy it.
Hopefully this has helped give you a holistic picture of the real costs of buying a home. If you’re interested in getting started, you can get started online with our friends at Rocket Mortgage® by Quicken Loans. You can also speak with one of their Home Loan Experts at (888) 452-8179.
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What Are Lender Credits And How Do I Get Them?
If you’re worried about paying closing costs on a home, you may be able to use lender credits. Read on to learn more about lender credits and you can get them.
What Is APR And Why Does It Matter?
When comparing loans, focus on the annual percentage rates attached to them. This figure, better known as APR, gives you much more information on how much a loan will cost you.