21 Unexpected Extra Costs to Prepare Your Clients for When Buying a Home
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For many people, buying their first home is a time of many different emotions. Exhilaration, pride and anxiety are just some of the feelings that the soon-to-be homeowner may have as they take on this major lifechanging event.
For new buyers, there is often one other emotion they may feel if their real estate agent has not prepared them ahead of time – sticker shock. Besides a mortgage, down payment and commissions, there are many other costs that are required as well as unexpected costs that may arise.
Your Client’s First Two Steps
Before the sale process starts, your client must take the following two financial steps.
1. Deposit Earnest Money. This good faith deposit is done when the purchase and sale is finalized. It shows that the buyer is serious about purchasing the home. This is usually 1-3% of the sale price.
2. Apply for a Mortgage. Although some people can finance a home purchase with cash, most buyers need to apply for a mortgage. To do so, they need to also fund a down payment. The standard is normally 20% although if mortgage lenders approve, it can be less than that amount.
Eight Closing Costs to Understand
In addition to the down payment, there are various closing costs a client must pay to secure a loan. The total of these costs is normally 3-6% of the overall loan amount. Prices for each type of service can vary depending on where the property is located.
3. Loan Originator Fee. The mortgage lender charges this fee to cover the cost of processing, underwriting, and executing the loan. This is typically 1% of the overall mortgage.
4. Private Mortgage Insurance (PMI). This additional insurance is required if the mortgage down payment is less than 20%. It is added as a premium to the client’s monthly mortgage payment.
5. Mortgage Points. This is prepaid interest that the client pays at the time of closing allowing them to get a lower interest rate as well as lower monthly payments. A mortgage point is equal to one percent of the total loan amount.
6. Escrow Account. There are two parts to escrow. First, an escrow account is set up by the mortgage lender with a neutral third party who then holds the earnest money and down payment until the final sale.
Once the sale is finalized, the mortgage lender will establish an escrow account from which property taxes and insurance premiums are paid, in addition to the client’s monthly mortgage payment. Most lenders require clients to deposit an amount equal to six months expenses in the escrow account.
7. Taxes. Most buyers are aware that they need to pay property taxes but may not know of one other unexpected expense — school taxes, which goes towards the cost of the expenses for a community’s public schools. Not all states have a separate school tax; in some cases, it is levied from the property tax.
8. Homeowner’s Insurance. In addition to standard home insurance, your client may also need to purchase additional coverage, such as flood insurance.
9. Home Appraisal. A home appraisal is required by mortgage lenders to assess the value of a home.
10. Title Search and Title Insurance. A title search is required to ensure there are no claims or liens on a property. A professional examiner will review all public records including mortgage deeds, tax liens, land records and other sources to verify there are no outstanding liens that would impede a sale.
Nine Other Possible Expenses They May Encounter
These are other unexpected costs that you should prepare your potential homebuyer about ahead of time.
11. Document Preparation Fees. Your client’s mortgage lender and/or real estate attorney may charge an extra fee to prepare the many forms required for a closing.
12. HOA fees. One unexpected expense that many people are caught unaware of is a Homeowner Association (HOA) fee. These fees, assessed by a neighborhood’s board of directors or council, pay for maintenance and upkeep throughout the neighborhood. These fees may range from as low as several hundred dollars a year to several thousand per month, depending on where the client lives.
13. Home inspections. During the last few years, when the market was red-hot and properties were selling almost as soon as they were listed, potential homebuyers were forgoing home inspections. Now that the market is settling into a more “normal” scenario, buyers have the flexibility to these inspections if they wish. In doing so, they can discover potential problems and assess the risk of going forth with a purchase.
In some cases, the seller will agree to make necessary repairs. But if an agreement cannot be reached and the buyer has their heart set on the home, they will have to absorb those costs.
Mortgage companies may also require a pest, asbestos and/or radon inspection. Most residences built before 1978 require a lead inspection disclosure.
14. Home Warranty. This is a service contract that limits out-of-pocket expenses for repairs or replacements in the home. It generally is for one year.
15. Legal representation. A home is the biggest financial investment most people will ever make. To protect that investment, it may make sense to work with an attorney who specializes in real estate. This professional will ensure that all the necessary legalities are covered.
After all the paperwork has been finalized at the closing, the attorney or escrow agent will file the deed with the appropriate government entity in the county, such as the Registry of Deeds, that proves that the client is now the legal owner. The cost to record a deed is approximately $125.
16. Monies in Reserve. It’s wise for your client to have at least two months of funds in reserve for mortgage payments and three to six months in reserve for emergencies or unexpected expenses.
17. Moving Costs. Unless the homebuyer is going to move themselves, they will need to hire a company to do that for them. And if they are not moving directly into the home right, they may have to pay for temporary living arrangements, dining expenses and storage for their belongings.
18. Survey Fee. This may be required if the property’s boundaries are unclear. This could potentially cost anywhere from $300-$950.
19. Wire Transfer Fee. This cost may be incurred if your client is wiring funds to purchase the home instead of using a certified check.
Two Additional Categories After the Sale to Think About
Once your client is in their new home, there will be other additional expenses.
20. Infrastructure Costs. Clients need to factor critical things like water, sewer and trash collections into their monthly budget.
If they don’t have a private well, they will need a hookup to public water.
Private sewer systems or cesspools need to be pumped once a year. If the system fails, it may cost tens of thousands of dollars to repair. (That’s why many states require private sewer systems to pass an inspection before the sale can go through.)
It’s important to also think about home heating and cooling expenses. Oil and natural gas prices can greatly vary year to year. And the client may not think they want to pay for air conditioning, but a prolonged heat spell may soon change their mind!
In many communities, a fee is assessed for trash to be picked up by a company that the municipality contracts with for that service. There sometimes may be extra fees for recycling pickup. In other circumstances, the client may need to contract themselves with a private company.
21. Miscellaneous Services and Expenses. Depending on where the client will be living, they may have extra expenses such as landscaping, pest control, snow removal and more.
Setting up a security system could be several hundred dollars or more and then approximately $100 a month for monitoring.
The client may need to also purchase new appliances, furniture, window treatments and outdoor machinery such as a lawnmower and/or snowblower.
Bonus Tip:
By keeping your client calm, focused and informed every step of the way you will help make the transaction as smooth as possible. In turn, they will be grateful for your professionalism and expertise. And they will keep you in mind for their future transactions, as well as refer you to their family and friends! For more information regarding educating your client on the overall buying experience, visit www.buffini.com.
