Aside from having to pay back principal and interest, before you even purchase a property, you’ll incur some expenses. When you think about it for a moment, everything has hidden or extra costs. Picking up a jar of peanut butter means having to buy jelly and a loaf of bread. Buying a car means having to pay for a license plate and insurance.
A home purchase is no different, only this is often the largest investment a person or couple will make in their lifetime. Over the course of thirty years, the most common debt instrument, that property will be worth more than you paid for it. That’s the good news and the great thing about owning residential real estate–it appreciates year after year and that equity can be used to make improvements.
However, to get to that point, you’ve got to buy a home first and that will cause you to pull out your wallet more than once. In fact, you’ll find yourself reaching for your checkbook several times when you buy a home.
The Home Buying Process
When you’re ready to buy a home, do yourself a huge favor and start planning and acting early. Before you fill out a home loan application, get your credit file from each of the three reporting bureaus Experian, TransUnion, and Equifax by going to Annual Credit Report.com. This can be done once per year for free and, it’s best to do this about six months in advance.
At the beginning of your mortgage, it can be a shock when you’re saddled with paying a couple months’ worth of property taxes, maybe a year’s worth of homeowner’s insurance and possibly homeowner’s association dues as well. —US News and World Report
Go over each report carefully and dispute any inaccuracies through snail mail because the online dispute systems do not provide enough space. Send proof along with your dispute and dedicate one letter to each dispute instead of lumping them together.
You’ll also want to work on reducing your debt-to-income ratio, or DTI, which is the difference between your gross monthly income and your monthly obligations. Though lenders approve applicants with a DTI up to 43 percent, to make it more affordable, try getting it down to under 40 percent or under 35 percent.
Associated Costs of Buying a Home
Once you’ve got your credit and finances in order, then it’s time to apply for a mortgage. When you find the home you want to purchase, you’ll have the following expenses:
- Moving costs. Expect to pay between $300 and $600 or more if you’re hiring a moving service, which is usually well worth the money. You can go the moving truck rental route and save yourself some cash, roping-in family and friends to help out.
- Utilities. Depending on your current living situation, you may be able to transfer your services free of charge. If you don’t have utilities in your name, you’ll probably be subject to a connection fee and possibly deposits on those accounts.
- Inspections. To ensure the home is in good condition, you’ll be smart to hire a home inspector and a pest inspector to do what they do best. These can reveal surprises even the current owners are unaware of existing.
- Insurance. There are at least three kinds of insurance you’ll need–homeowners, title, and private mortgage insurance. If you put down 20 percent or more, you’ll be able to escape the PMI, but will still have to get homeowners and title insurance.
You should also have at least two months worth of principal, interest, taxes and insurance in a savings account as well as a contingency fund of $1,000 to $2,000 for inevitable repairs.