You found it. It’s a perfect house for you with all the amenities you have been looking for, and it’s the right price. But how much do you really need to buy that dream house and to keep it, maintain it and still live the life you want to live?
That’s a tough answer to truly know until you write it all down, research it and understand what short-term and long-term costs of owning a home are all about. The cost of ownership doesn’t stop at the mortgage. It’s all those other things like property taxes (that can go up and up), property insurance, utility costs, replacing a broken refrigerator (which can cost $1,000 or more), and a whole bunch of other things.
“People get so excited about the purchasing of a home that that’s the only thing they can think about,” says Linda Ferrari, realtor with Keller Williams Realty in Orange County, Calif. She also is a national consumer credit score expert and author of The Big Score – Buying Power for Life.
“You just don’t want to over purchase. You need to include everything that goes into a budget and all your monthly bills and your lifetime expenses that will come up such as college for your kids or retirement fund,” she says.
How Much Can I Afford? Know This Rule of Thumb
Most lenders will approve a mortgage when the borrower’s total housing expense plus all other debt payments equal 45 percent of their before-tax income.
But that doesn’t mean the borrower should try to hit this number. Some experts advise a home payment that is 25 percent of the borrower’s take-home pay. That’s quite a difference compared to the amount the lender will approve.
It is important to plan for possible future expenses. Many first time home buyers, by definition, don’t have the homeownership experience to foresee everything that might come up.
Ferrari recommends that you find a really good realtor who knows these costs.
“You need a buyer’s consultation with that realtor to go over everything that is entailed with buying a house,” she says. “There is a lack of information and a lack of planning when people buy a house. I am proactive and a believer in doing the research you need to do and knowing exactly what you are getting in to.”
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Read the Purchase and Sale Agreement
Once you do find the house you want, it’s very important to read the residential purchase agreement. It may be 10 pages or more, but it explains all of the things that a buyer will be responsible for.
“Everything is open to negotiation, but it gives you a very good idea of what you will be paying,” she says.
What costs do you have initially with buying a house? Here are the big and little items that can drain your checking account:
Earnest money — It’s the deposit made by prospective buyers as their goodwill gesture saying they are they are in it for the long haul.
Inspections – This can be about $400, but if you want any other inspections (and Ferrari always advises a sewer inspection for $150), it can all add up.
Closing costs –This includes all kinds of fees such as title services, lender’s origination fee, lender’s title insurance, and credit report fee. These can add up to between $1,000 to $3,000+.
Down payment – Depending on your loan, it can be from zero percent for a VA loan to 20 percent or more for a conventional loan.
Moving expenses – If you can’t beg, borrow and woo your cousins with trucks and friends with strong backs to come lift 30 pound boxes and heavy couches, you need to hire movers.
Initial Moving In Costs – The black paint in your new master bedroom just won’t cut it. So, you have to paint it before or right when you move in. And then there’s that hideous gold carpet throughout the first floor. What about buying a lawnmower, a shovel or snow blower and a new water heater because the old one broke the day you moved in? It all adds up.
Flood or earthquake insurance – Depending on your region of the country, these can save you financial devastation if something happens. Flood insurance is subsidized by the government and therefore comes with a relatively low price tag. Earthquake insurance, however, can be thousands of dollars per year.
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“You just have to make sure you get the very best value of every financial commitment you make – not paying higher interest rates or not putting your money into big deposits or down payments. That’s wasted money,” Ferrari says.
Home Buying Can Come with Sacrifice
Even people who have already bought a home are finding it tough financially. Over half of Americans (52 percent) said that have had to make one major sacrifice in order to pay their rent or mortgage the past three years, according to the House Housing Matters Survey by the MacArthur Foundation.
Some of those sacrifices were such things as postponing saving for retirement, cutting back on health care, working a second job, running up credit cards and moving to a less safe neighborhood or one with less worthy schools.
So the lesson in much of this is to be prepared and knowledgeable about all of the expenses that come along purchasing a house – and not just the bills that are naturally associated with it. There are hidden costs, unexpected costs and continuous costs.