Buying A House Budget
"The journey of a thousand miles begins with one step." - Lao Tzu
With any BHAG (Big Hairy Audacious Goal), thank you Jim Collins, it takes breaking it down to small tasks that you complete to accomplish that big goal at the end.
In our case, it is buying a house. There are get rich quick schemes out there for investors "start investing in real estate with $0!" (this is wholesaling and I'm not the biggest fan). There are commercials of buying cars with $0 down. But you'll never see HOW CHEAP IT IS to buy a home! That's because it's not. Maybe at one time in our not so distant past, it was (stated income, $0 down) programs that got us into trouble. These days, lending is much stricter and standards have gotten tighter. Good.
In reality though, even with all of the stricter guidelines and standards in place, if you take the right steps, budget the right amount of money, you can buy a home and feel confident that you're not house rich, cash poor.
Talking with a good lender is a GREAT place to start. I've got a list of 3-5 that I know, like and trust. I would be happy to refer you to them.
In this blog, though, I will walk you through the budget it is going to or should take to buy a house.
***This blog does NOT consider VA or USDA Loans***
We will start with the most important part. The Down Payment. Down payments are going to range anywhere from 3-20%+ Of the Purchase Price of the Home. Anything Less than 20%, lenders will require Private Mortgage Insurance. In this discussion, we are going to look at the most "affordable" entry point, or 3%.
Example: Purchase Price $300,000 = $9,000 Down Payment (3%)
Earnest Money is a security deposit in essence for those of you who have rented for many years. The difference with EM though, is that EM is held in escrow by a neutral 3rd party, generally a title company. EM can range, but is going to be around 1% of the purchase price. For budgeting purposes, this will work. A $300,000 home will generally ask for $3,000 in earnest money. This EM is fully refundable if you need to cancel the contract for any reason within the contracts limits.
When you go under contract, you will have dates and deadlines to complete. Title work, insurance contingencies, inspections, ILC's/surveys and appraisals. Inspections will be one of your few expenses while under contract that will be due at the time of completion and non refundable. Based on the size of the home and the type, a.k.a Single Family, Duplex, and Commercial, your inspection cost can range. Single Family homes between 1500 and 2500 square feet will be between $350-$500. If you'd like to get a Radon test, which I would suggest you do, they will cost an additional $125-$150. This is optional, but a very good idea to get tested in Colorado.
ILC/Survey – Improvement Location Certificates ILC’s are not typically required by title companies if you are buying in a subdivision. If you are buying a custom home on a unique lot, the title company may require an ILC. If you're buying a commercial property, an ILC will be the minimum requirement, but more than likely a survey will be required by title. ILC's will range between $250-$500. Again, these monies will be due prior to you receiving the report.
Appraisals - a lender will higher an unbiased 3rd party to conduct an appraisal of the property. This is an evaluation of the value of the property. If you're getting a loan, your lender is going to require an appraisal. These will range from $600-$700 for your standard single-family home. The larger and more custom your home in question is, the more expensive an appraisal will be. The cost for the appraisal, depending on your lender, is generally paid for at closing. IF you do not close after the appraisal, those monies will be due to the appraisal company out of your pocket.
Closing Costs – These are fees and prepaid expenses due when you close on your home and loan. They will be 1.5-3% of your loan amount. These can fluctuate depending on if you “buy down your rate” and the time of the month you close.
Examples of closing costs: Title Fees, Recording Fees, Lender Fees, pre-paid expenses (insurance, taxes and interest) and funding your escrow account.
You can POSSIBLY Can wrap your some or all of your closing costs into your loan in exchange for a higher interest rate. Talk to you lender. In addition, you could possibly negotiate closing costs in your contract offer to be paid for by the seller in the form of a seller credit/concession.
HOA – Home Owner's Association. These are more common in newer neighborhoods in Northern Colorado. Anything built after 1990 could easily have an HOA. It is a governing set of documents and a governing body to enforce the rules and regulations of the neighborhood. These HOA's charge their residents monthly, quarterly or annual fees that could be used to pay for landscape, snow removal, a discounted trash service, a pool. The fees are used based on a budget and voted on annually. These HOA dues are NOT Escrowed and should be budgeted.
Reserves - Save up 3-6 month’s worth of your mortgage payment and HOA dues. Don’t touch it. This is your lifeline and as we are seeing, you need that lifeline now more than ever. Reserves are generally looked at by your lender in the form of liquid assets (IRA, Bank Accounts, Investment Accounts) at the time of obtaining the loan, but they are not usually discussed directly as something you should always have.
These are the main areas financially that you should budget for when buying a home. Lets look at an example:
Purchase Price: $300,000 w/ 3% Down - 30-Year Fixed Mortgage at 3.5%
Down payment: $9,000 (Earnest Money $3,000)
Inspection + Radon Test: $500
Closing Costs (2%) on a loan amount of $291,000: $5,820
Mortgage Payment (Including Taxes, Insurance, Private Mortgage Insurance and HOA): $1750/Month * 4 Months = $6890
$22,210 is an amount that if you are looking to buy a $300,000 would be enough to afford the down payment, closing costs and allow you a cushion in the event you get sick or can't work a few months. This dollar figure would also allow you to have a cash cushion to avoid buying a house and being "house rich and cash poor".
There are many mortgage calculators out there and you could easily plug and play depending on the price of home you are looking at buying. Budgeting for your first home isn't difficult if you break it down and don't forget all of the ares discussed above.
Don't be like me and get caught three days prior to closing on your first home and be introduced to closing costs. That's a painful and scary number to be thrown your way, when you're already putting $10,000+ out to buy a home.
I hope this helps plan on your way to buy your first home!