If you have never bought a home before and are not familiar with the process, closing can be very frustrating and you will find out there are expenses that you may have not budgeted for. It is better to know about these beforehand, that way you can plan for them and make this process easier for you. These are home expenses associated with buying a home:
1. Origination Fees. In other words, getting approved for a loan by the bank. You will have to pay the bank a fee (typically of $500) for getting your approved for a loan. In addition, you will have to pay for the home being appraised by a professional (can range from $400-$1500).
2. Tax Payoffs. If you purchase between the tax billing cycle someone is on the hook for the taxes. That person is typically the buyer in the transaction. There are times when the seller will pay until the end of the next bill but in most cases the buyer needs to pay the per diem. This is another payment that can be in the thousands of dollars depending on the billing cycle and amount of property taxes.
3. Tax Escrow. Perhaps the biggest expense in buying a home is the tax escrows. While technically not a closing cost this accounts for thousands of dollars. Every time you buy a home the new lender will establish an escrow account to pay your taxes. Instead of receiving a property tax bill every quarter or every six months your new lender will pay your taxes for you. Before they do this they require typically six months of taxes, or more, in a dedicated escrow account. They do this because they never want to have an escrow shortage and try to get money from you, the homeowner. They will always keep a cushion just in case of a sudden tax increase from the town. While this makes sense in theory it comes at the buyer’s expense.
4. Homeowners Insurance. The homeowner’s insurance works very much like the property taxes in regards to what is required before the closing. Prior to taking ownership the lender requires a full year of insurance. Making this prepayment for the year does not omit you from making your regular monthly payments. Your insurance payments will still be on your monthly statement. Homeowners insurance on an investment property is typically much higher than a primary residence. This is usually increased with every additional unit in the property. A three family investment rental property can have homeowners insurance well over two thousand dollars a year.
5. Home Inspection. Yes, that is not a hidden home expense, but home inspections can be very thorough and you may end up spending more than you had originally thought. They offer extras like radon test, sewer line cameras, infra red camera inspections, mold, asbestos… All of this can add up and you have to think what is most important to choose from or you can do them all, but they come at a price.
6. (BONUS) Miscellaneous Home Expenses. The HUD-1 settlement statement is the breakdown of all expenses and payments made during the transaction. You need to make sure you take ownership with a clean title. If there are liens on the property they have to be cleared. This is almost always at the buyer’s expense but if they don’t have the funds to pay them off you they will fall on your lap if you want the property. You also have expenses for attorney fees, title search, title insurance, recording fees and specific lender fees not associated with origination fees. These fees quickly add up and can easily reach thousands of dollars.