Updated: Jan 24, 2021
When you are looking to buy your first home you are acutely aware of the down payment. That is the number you are focused on and spending all your energy scrimping and saving towards. It's also usually a very daunting number and often is the one reason why many first-time buyers never make it to the actual closing table. They believe that in order to secure the property you have your heart set on, you are required to put 20% down. In a market where most houses go for over 200k or 300k that can be a huge chunk of money. Don't fret though, I will discuss ways to do this more in a future blog post in this series. But for now I want to focus on all the numbers that you may not have known about. Purchasing a home involves lots of hidden fees that are seldom discussed until you are actually in the buying process. My goal is to give you a heads up earlier so you can plan accordingly and not be taken by surprise like I was.
Photo Credit @ Kelly Sikkema
If you haven't already utilized a mortgage calculator, I recommend you do so. When looking to buy a place I regularly type in numbers feverishly over and over trying to get them to where they need to be. And while mortgage calculators can be great (I have one saved to my bookmarks), they don't include all the additional acquisition costs that are required to secure the property. They usually just give you a rough starting point to begin building your budget from. There are more numbers that you will need to anticipate and take into consideration to be fully prepared.
In this list, I've included all the ones I have experienced so far, but I am sure there are more out there. I will do my best to prepare you so there are less surprises along the way, because I distinctly remember the panic I felt each time when my broker or lawyer called up and asked me to transfer more money over for this or that reason.
Photo Credit @ Fabian Blank
So here it goes, here are your costs you should anticipate on top of your deposit money:
1. Inspection Fees
This is crucial. Don't skip it. The inspection is where someone with way more knowledge and expertise regarding houses will walk through the property and go over it with a fine-tooth comb. They will tell you what major work has to be done (if any) as well as all the minor things that ideally would be addressed. This person gives you so much information on the condition of the property and maintenance in an attempt to set you up for success as a homeowner. Because you will be responsible for all the maintenance once you own it, these fees are worth their weight in gold because they can provide you with a lot of knowledge.
Inspectors tend to be in the "you get what you pay for category." If you go cheap, you will likely get a cursory look over the property or an inspector who isn't really interested in educating you, but rather in inspecting as many properties as he/she can in a day to get as much money as he/she can in a day. As a #firsttimehomebuyer this is not what you want (unless maybe you have extensive experience in construction yourself). You want someone who is going to tell you everything about a property. You want someone who will be open to you asking questions during the process and will be willing to teach you. Home inspectors are not required to do this. Many like to go in, do the inspection by themselves, write up the report and then give it to you. They are hesitant to give you specific money values regarding fixes and repairs because they don't want to be held liable if they are wrong. So if you are a complete newbie, you want to look for someone who is a talker and enjoys sharing their knowledge. The money you put into the inspection fees will save you a lot of money in the long run.
Photo Credit @ Julie Molliver
How much do inspectors cost? It varies region to region, based on the size of the house and the age of the home, and the level of experience of the inspector. Really good inspectors are in high demand and can charge more. In my experience though, for a single family home in Upstate New York it has ranged from $350 to $500. Keep in mind this is a ballpark for the town I purchase in. Your location may have a very different range. Get a few estimates to compare so you have an better idea of what they charge in your community for the size of property you plan to purchase.
One additional tip: Sometimes inspectors are willing to charge about half the price to do a "walkthrough inspection" meaning they don't write up a report. Some states allow this, some states don't. While it may be tempting to save some money here, I don't recommend it as a first-time buyer for two different reasons: 1) When they put the report into writing, if they miss something major, you can hold them personally liable should you close on the property and learn after of a major defect that wasn't disclosed in the written report, and 2) Often you can use the report to negotiate down the price further. This always helps when it is actually in written form so you can just send it to the seller's agent and they can see in black and white any additional costs that weren't accounted for in the initial offer.
2. Bank fees
This can be a black hole depending upon who you get your loan from. Banks love to charge "junk fees" and call them all sorts of things like "underwriting fee" or "recording fee."
The good news is that after you receive your commitment letter (a letter stating that the bank agrees to fund your loan if all the information you provided ends up being accurate when they confirm it in the underwriting process) they are then required to give you a "good faith estimate" with the maximum amount possible that they will charge you for the loan. It literally lists everything from title insurance fees to PITI, which you pay in advance, to any local fees. Depending upon your relationship with the bank, you can sometimes negotiate some of them down. In my experience this "good faith estimate" has always been way higher than they actually charge because the bank wants to cover their bases. Essentially if it's not in the this document when they issue it, they can't charge more for it later, even if the market shifts.
Photo Courtesy of New York Public Library
One of the major fees not included in the "good faith estimate" is the appraisal (at least in New York. This may vary state to state). The appraisal you pay for separately but the bank arranges for it entirely. They will charge you for it early on in the process because they have to pay the appraiser and get back their appraisal in order to close on the loan.
Ostensibly an appraisal is a third party person coming to assign an objective value to the property. Banks require this because they do not want to loan more on a property than what it is worth. If appraisals come back under the agreed upon sell price, this can sometimes be used to renegotiate down the sale price with the seller. If they are unable or unwilling to do this, it could mean you will have to pay the difference out of pocket or if you can't, it could possibly be a deal killer for the loan.
I personally have never never had an appraisal come back where I have had to renegotiate the deal. With that being said, there is another avenue of recourse should this happen to you. You could ask the bank to order another appraisal and pay for it. I would only recommend you do this if you have the comps to prove that the previous numbers were inaccurate. A good real estate agent should be able to help provide you with this. That is part of why you hire them. Their goal is to help you negotiate and renegotiate the deal until it clears. While they can't complete the appraisal themselves (they are not an objective third party, because they represent you), they could help provide data to an appraiser that could assist them in understanding the values in the local market better. Whether the new appraiser chooses to utilize it, it is is up to them. Usually though people are more than willing to use data if it helps make their job easier and if it saves them time.
4. Lawyer fees
This is another area where I wouldn't skimp. When you hire a lawyer, their job is to look out for your best interest in the deal. Again, you want someone who enjoys teaching you things that you may not know about the process. My lawyer has been incredible!
A friend recommended my lawyer to me when I was buying my first home and I have used him on every property purchase since because he is incredibly knowledgable and takes the time to answer all my questions (sometimes more than once, lol). He never makes me feel like I "should have known" something and he is super responsive when I send an email.
While lawyer fee structures vary greatly, I have chosen a lawyer that charges a flat fee from beginning to end. The reason I went this route is because as a first time buyer, you are going to have lots of questions. Phone calls and emails could really add up if your lawyer bills you by hour. And again, a really good lawyer will save you money in the long run because they are the ones who really help ensure that the contract that you and the seller go to sign (the purchase agreement) is well understood by you and protects you thoroughly. Good lawyers are worth their weight in gold too. If you find one, build that relationship with them and hold on to them. Should you decide to expand into real estate investing (which you know I'm an advocate of) they will be one of the most important people on your team!
You don't always have to pay for a survey, but its possible you may have to. I didn't for my first couple properties, but my third one required me to do so because the property had been in the same family for so long that there wasn't a survey on record with the city and the title company required one to provide title insurance.
What a survey is, essentially, is a document that verifies where the borders of your property start and stop. It is important to know this so you are aware in advance if there are any covenants or encumbrances on your property. These are just fancy ways of saying are there any other buildings accidentally on your property or access that you may have to provide to other people, like a neighbor, in order to get to their property. There are many different types of convenances and encumbrances, but surveys uncover this so you know what you are buying before you sign the papers and the ink dries.
Just to give one more example, when purchasing the property where I had to get my own survey done, it had a old 4-car garage on it. In the listing it said I had access to only one part of the garage. The survey verified that the other parts of the garage were in fact deeded out to the neighbors so it was a formal legal agreement. Because this was in the listing, it wasn't a surprise to me or a deal-breaker, but if it wasn't in the listing and I found that out, it might have been.
Again, surveys range depending on the part of the country you are in. In my area it's usually between $1000-$1500 for a normal-sized city lot. This fee is normally not one you will have to pay if they already have a survey on record or if you are buying a condo or a co-op.
6. Transfer tax
These fees are traditionally paid by the seller, but not always. Sometimes they are paid by the buyer so it's important you ask early on. Depending on your location and who you are buying the home from, you may end up with this. Distressed sellers and REOs sometimes pass this fee on to the purchaser. Ask your real estate agent about these fees. They should be able to provide you with them in advance so you can plan them into your budget accordingly.
7. Luxury tax
While this is not one I've had to pay yet, lol, perhaps one day in the future I will. This tax varies from state to state and some states I'm sure do not have a luxury tax, but it is something you should look into and be aware of in advance if you are buying a pricey home. In New York there is a luxury tax placed when you purchase a property over a million dollars. This may be important to know when negotiating your purchase price. If you can get it a dollar below a million, it could end up saving you a considerable amount of money in the end.
Photo Credit @ Alexander Schimmeck
8. Co-op and HOA fees
Again, these fees vary based on each community you are looking to buy into. They also vary in what the fees cover specifically. I remember being blown away by the monthly co-op fees I would have to pay when I closed on my apartment in Brooklyn. What I didn't realize when looking, but my lawyer later explained to me, was what all it covered. They seemed high but it included: property taxes, heating and water, security, property maintenance, etc. When that first heavy snow fell and I saw the men out there immediately snow blowing and clearing the sidewalks, it clicked. It may have seemed like a ton extra to pay each month, but I now know the real value of these fees. I actually think they are a great deal now and save me a lot of money in the end.
Your lawyer should read the bylaws and share this information with you. A good lawyer will know to break down what the fees mean for you and check to make sure the co-op or HOA have ample reserves so that there aren't any large assessments happening right after you are closing (an assessment is additional money charged to the tenants to complete their share of a capital improvement project like replacing the roof or repaving the parking lot). If your lawyer doesn't share this with you, ask. Also, first time buyer tip, make sure their reserve account is well stacked because it reduces the chance of you having an assessment right after you buy the property.
9. Utilities such as water, electric, trash removal and sewage
First-time buyers often overlook these fees and how much they add up to. Usually that is because they have never had to pay them. Either they have lived at home, where their parents have paid them up until now or they have rented and the landlord has covered them and rolled them into their rental fee. These can really add up depending upon the size and the condition of the house. So if possible, try to get an estimate of what these costs are from the seller. Some will provide it, some won't. It's always worth asking though because the worst answer you can get is a "no."
These fees have to be settled in order to close a property, meaning that if there is an electric bill that is long overdue, the seller has to pay that off. Sometimes that can happen from the money they get back in closing. Sometimes they have to pay in advance. This could be used as a negotiation tool in some cases to get a lower sale price if you are willing to backpay certain utilities that the seller has fallen behind on. Just keep it in mind as something to research and create a budget around in advance so you know what to expect.
Photo Credit @ Maria Ziegler
I share all these fees not to scare you, but just to help you to gain an understanding that fees that might pop up. By knowing them in advance you can see which ones will absolutely happen, and you will be able to plan for them. For those that may happen, ask your real estate agent, lender or lawyer about them. They will be able to give you an idea if that particular fee will be relevant to the property you are purchasing. Not all fees are required for all categories. Just try to budget for the ones you anticipate from the beginning so you have an extra fund ready for it, in addition to your deposit. If you don't end up using that money, great! But just having it there can definitely help reduce anxiety and stress along the way.
Did I forget any? Did I leave any off the list? Please comment below if there are any others I may have overlooked.
More to come soon on how to pull together a down payment and how to create an actual budget for your first purchase!
Hope you found this useful!