Buying a house is a huge milestone, and if you’re a first-time home buyer, it can be pretty intimidating. If you haven’t done some research upfront, the process can seem like a maze of paperwork and fees, with no end in sight. Getting clear on costs, credit and what you can afford at the outset can make things a lot simpler.
So, what does buying a house actually cost? Well, it's easy to just look online and assume that buying that house with the great open-beam ceilings and redwood deck will cost just what the listing says. But of course there's more to it than that.
Buying a home involves two types of costs: One-time costs that are generally paid up front, and ongoing costs that you should plan for over time.
Your up-front costs will include things like earnest money, your down payment, home inspection fees, and closing costs for your sale. Let's start with the one that takes some first-time home buyers by surprise: earnest money.
Earnest money is paid by a buyer when an offer is made, and usually comes out to about 1 – 5% of the purchase price of the home. The money is held in escrow while the offer is in negotiation, and if an offer is accepted, the earnest money is applied toward down payment. Earnest money is refunded if a purchase negotiation fails, or an inspection falls through. It can be forfeited, however, if the buyer retracts the offer or defaults on an agreement.
A down payment for a purchase, which includes earnest money, is used to secure a home loan and establish ownership. The majority of lenders require at least 3% of the sale price as a down payment: A house selling for $340,000, for example, would require a down payment of at least $10,200.
After a buyer and seller agree on the terms of a sale, it's time to get the property inspected. Having a home inspection prior to purchase is like taking a used car to your mechanic before you buy it: It can provide you with great peace of mind, and catch any needed repairs—major or minor—before you seal the deal. Closing costs are the last of the one-time expenses associated with the home buying process. Average closing costs range from 2.5 – 3% of the total loan amount. Buyers sometimes ask sellers to pay part or all of the closing costs as part of the negotiation of the terms of the sale.
First time homebuyers who have attended a live seminar, webinar, or a first-time home buying self-paced course will be rewarded with a $250 coupon. This coupon can be applied to your closing costs on a BECU home loan. Limit one coupon per loan.
The ongoing cost that impacts a buyer the most is also the most consistent and predictable: the mortgage payment. It's pretty easy to plan for each month, but it's also usually going to be the largest cash outlay each month.
So what's in a mortgage payment? Most mortgage payments include principal (the balance of the amount owed), interest (the rate charged on the loan amount), property taxes, and homeowners insurance. If the down payment was less than 20%, the lender will also require private mortgage insurance (PMI) to protect them in case of default.
Another thing to consider when thinking about monthly home ownership expenses are home owners association (HOA) fees. Many condominium complexes, gated communities, and certain housing developments charge HOA fees to cover shared maintenance, recreational facilities, and landscaping, among other things. They may be payable monthly or annually, and can vary widely in cost, so make sure you are clear on the amount of an HOA fee before you buy.
Even though they don't occur monthly, you should also prepare for home maintenance costs that will arise over time. Plan to set aside a bit of cash each month to save up for fixes like water heaters, windows, gutter maintenance, roof repair or replacement, and the like. When some unexpected maintenance issue comes up, you'll be glad you did.
Use these calculators to figure your payments and how much of a down payment you should have:
How much can you really afford?
Many first-time home buyers worry about “getting in over their heads” with a loan. It's a valid concern, because buying a dream house that has unsustainable monthly payments can open the door to a lot of problems. It's much healthier to find out what is truly affordable based on their financial situation, create a budget around that, and stick to it.
Here's an easy way to explore how much home you can afford, based on your income, and see the associated monthly payment ranges.
Use this calculator to figure how much home you can afford
Your credit report
Essentially, a credit report is a record of how you've managed your debts. Having a good credit report is a key factor in getting better home loan interest rates, and saving money on closing costs and interest paid.
You should check your credit report about 90 days before making a major purchase like a new home. You can check your Equifax, Experian, and TransUnion credit reports for free at annualcreditreport.com.
You've also heard the term “credit score,” but you may not be sure how that differs from a credit report. A credit score is a rating system that gives lenders a guideline to determine your home loan “creditworthiness.” You can find your credit score at myfico.com. Fees for credit scores range from about $13 – 18.
You can also view your FICO on the account summary page by logging into online banking.
Improve your rating
If your report isn't as positive as you'd like it to be, here are 4 ways to help clean it up:
Correct errors immediately: If you see mistakes on your credit report, contact the credit bureaus directly to get them cleared up
Document everything: Keep a record of all payments made in case proof is required to correct errors
Reduce debt levels: Pay down any outstanding debts to within 1/3 of your available credit limit
Be prompt: Make payments on time—they will count against you if they are made after the due dates
Go in prepared, come out happy
Once you have a clear picture of how much you can afford and the actual costs of buying a home, your job as a home buyer becomes much easier. Knowing what to expect, and preparing for the process ahead of time is key to a positive home buying experience.
This is for informational purposes only and is not intended to provide legal or tax advice regarding your situation. For legal or tax advice, please consult your attorney and/or accountant. Investments are not federally insured, not subject to credit union or affiliate guarantee, and may lose value.