You are about to make the largest purchase of your life. Protect yourself! Here is a list of items to keep in mind before buying a house.
Find and hire a qualified home inspector who is licensed, has been in business for a period of years, and who comes highly recommended. Make sure the inspection report is in writing and that you review it with the inspector. It is best to be at the inspection with the inspector. Always ask for a radon (radioactive gas) test. Find out the ages of major items like the roof, heating system, water heater and well. If they are old, find out the replacement cost. Do not be afraid to ask for credits if something major is wrong. Unless stated otherwise, the house is supposed to be in move in condition with no major repairs necessary. If major work needs to be done, including a “fixer upper”, get quotes from licensed contractors to use as bargaining tools, even if you plan to do the work yourself. It almost always costs more than you budget so leave at least a 10% contingency.
Similar to the inspection, we never advise that you or your realtor represent you when buying a home. For a few hundred dollars you will have proper legal advice, document review and protection. There are hundreds of pages for the mortgage documents, including the closing documents. In my own experience, the closing documents have been wrong two out of three purchases. Once they referenced the wrong house entirely!
Miscellaneous costs at or near purchase
There are always more costs than you expect! Prepare for them.
1. Points or no points: “Points” refer to paying some of the costs of a mortgage up front to get a lower interest rate. If you know with certainty you will live in the house 10 years or more and that you will not refinance because your rate is already low, then you can consider “points”. Seek advice on this as paying points usually works against you.
2. Closing costs: Find out how much the closing fees are for the mortgage, the cost of your lawyer, real estate taxes due at closing (partial period from previous owners last payment to date of close) and any other costs that need to be pro-rated. These are due up front at closing and can total thousands of dollars.
3. Furnishing/outfitting: When you move in, count on at least $5,000 to outfit the house.Shower curtains, bath mats, cleaning supplies, paint, minor repairs, basic shades/curtains, pots and pans…all of this adds up quickly and, depending on your taste and needs, this could be a lot more than $5,000! Also, major items like appliances, beds, couches and bureaus cost hundreds to thousands of dollars. If you need furniture, do some shopping first to see what you can afford before you sign. Milk crates get old!
A subset to this same type of purchase involves yard maintenance. Do you have a snow blower, lawnmower, wheelbarrow and the yard tools? Go to a hardware store and price what you need.
4. Realtor commission: This is trickier today due to buyer’s brokers. Before you hire a realtor/broker, make sure you know who they represent, who is paying them, and what that amount is. You want to make sure they have YOUR best interest at the forefront. You also do not want to be surprised by having to pay two or three percent of your purchase price at the closing!
5. Title insurance: The mortgage company will insist on this for their portion of the home’s value, and it is highly recommended you get it on your portion as well. Titles have been challenged by all sorts of situations…this covers you.
6. Cash reserves: Finally, keep 3-12 months of salary in a cash reserve. Murphy’s law loves homes. An alternative is to get a home equity line of credit where if, and only if, you need some money to cover the unexpected, you can withdraw it from your equity in the home. This is usually available when you have 10%-20%+ equity in the home, you are able to borrow a portion of your equity. This method allows your cash reserve to work for you by becoming equity, lowering interest payments due to a smaller mortgage and possibly avoiding PMI (see PMI explanation below).
Ongoing costs (in addition to the mortgage):
1. Maintenance: Houses cost money to maintain and run. Some examples include loose or damaged roof shingles, window or door screens, refinishing your deck and similar. You can expect annual maintenance to be about 1%-2% of the purchase price per year.
2. Utilities: What kind of heat does the house utilize and what does it cost per year? Do you have a well or municipal water? Sewer or septic? Ask what the total cost of utilities are per year.
3. Private Mortgage Insurance or PMI: With exceptions such as some first time homeowner purchases, most purchases with less than a 20% down payment will require PMI. This is added to your monthly mortgage rate and usually is in the 0.25%-0.50% range. Do your research on rates and first time buyer rates/programs! If you can’t afford the 20% down and the additional monthly cost, maybe consider revising your budget.
4. Real estate taxes: These can be added to your mortgage payments or paid directly to your municipality. Find out the current rate and budget for it (listings often show last year’s rates). Also, many people forget that taxes increase annually in most places for Town employee raises and other annual costs to your municipality. Also ask if there have been any recent passage or pending passage of large building projects or similar town projects such as building a new school or fire station. Leave some room for these costs to increase!
5. Homeowners Association (HOA) or condominium Fees: Find out if there is a HOA fee, a condo fee or similar ongoing neighborhood/building maintenance fee. These monthly or quarterly costs need to be added to the monthly budget. Most importantly, are there any capital assessments pending or being discussed by the HOA or condo board? If the roof needs replacing, the road repaving or similar large, capital projects, these are usually assessed to the homeowner proportionately to the size of your unit. Capital assessments can be tens or even hundreds of thousands of dollars per unit!
6. Property and Liability Insurance: Most people don’t buy this until buying a home. You will most likely be required by the mortgage company to have this. Check with an insurance professional to learn about costs and coverages so it can be worked into your budget. While you are at it, ask about life insurance and disability insurance for the income earners. At least learn the coverages and costs and make an informed decision. What if something happens to the primary earner… how will the family members afford to stay in the home?
It is so important to be informed going into one of the largest purchases you will make. You do not want to stretch yourself so thin that you are unable to deal with the unexpected. Over the years we have seen it happen to clients and children of client and don’t want it to happen to you!”