Costs Associated With Buying Your First Home

[William York]

                                                                               Costs Associated With Buying Your First Home

As a purchaser in a real estate transaction there are two costs you are responsible for, your downpayment and your closing costs. While these costs differ greatly based on your property and financing options below is listed some of the figures you should be prepared for.

While depending on your title company and lender for exact closing costs to provide a rough estimate going into any transaction assume 3% of the purchase price will be needed. We will touch on this later but if this was an unexpected expense you were not prepared for a seller credit is a strategy you can utilize to help mitigate these costs.

Loan related costs are calculated into your closings costs and while these vary based on your lending partner there are several key factors that are added up to produce this number. Your loan orientation fee, this includes fees for processing the loan application and can vary based on the lender. Your appraisal fee, the cost for a professional appraisal of the property's value. Some lenders also charge for underwriting and credit report fees.

Next are your title fees. Your title search ensures there are no issues with the property's title and protects against any potential title disputes. You can also opt into title insurance, this protects you in the future against issues that can include mechanic leans, encroachments etc. Title will also charge you for recording fees.

There are also some pre paid expenses you may pay at closing. These can include home owners insurance, property taxes, HOA fees etc.

You will be provided documents prior to closing with all of these fees listed out so you are fully prepared to pay them at the closing table. One strategy I highly recommend for all buyers is utilizing a seller credit. Depending on your home purchase and financing options you can opt into a seller credit to be applied to your closing costs. Why might a seller accept this you may ask? Instead of offering 100% of list price you can offer 103% of list price with a 3% credit. This allows the seller to net the same amount but you get your closing costs covered to allow you to keep more cash in hand. This will increase your loan balance and increase your monthly payment slightly but you can work with your lender to see the benefits of this strategy and if it is right for you.

You also do not need to offer more than list price, depending on your market and how competitive the property is you may get a seller credit and offer at or below list price. Please see a previous article by BPG on seller credits for more information regarding this topic.

The second expense to a buyer is the downpayment and the one most people focus on. Many think you need 20% down to buy a home and this could not be further from the truth for a first time homebuyer.

First time homebuyers can take advantage of FHA loans, these are backed by the Federal Housing Administration, these loans may require as little as 3.5% down payment! VA loans are another fantastic option for our military personal and may require no down payment at all. Another option are Conventional loans with a downpayment sometimes as low as 3%. With a lower downpayment you do have a smaller equity stake in your home off the bat but it allows you to get into homeownership sooner and start growing equity. One buzz word to be aware of with a lower downpayment is Private Mortgage Insurance (PMI), if your down payment is less than 20%, lenders typically require PMI. This insurance protects the lender in case of default but adds an extra cost to your monthly mortgage payment. Work with your lender to see if you would rather keep 16.5%-17% more cash in hand or lower your monthly payment avoiding PMI.

There are also a lot of grants and first time home buyer programs which can help on closing costs as well as downpayment. Ask your lender what you may qualify for! Utilize your lenders skills as they can help you set up financial strategies on how to put money away for these costs, help increase your credit scores and financially plan for your home purchase.

While buying a home as a first time buyer sounds scary and requires a lot of money there are many strategies to take advantage of that offer you low money down options. Connect with your lender and a realtor six+ months before you want to start getting active in the market so you have time to plan for one of the most exciting purchases of your life. Good luck and reach out to the team at BPG Residential for any real estate questions you have.