How to Avoid Over-Paying for a House
When you buy a car, you know it comes with additional expenses beyond the sales price. Fuel, maintenance, sales tax, insurance, and registration add up to several thousands of dollars a year. The same is true with buying a home. However, many buyers don’t budget for the actual costs of homeownership. They think that the amount for which a lender pre-approves them is all they need. Lenders’ approvals don’t take into account the costs of homeownership, just the cost of buying a home. Learn how to avoid over-paying for a house.
Buyers who don’t budget for all the costs of homeownership run the risk of sentencing their families to a “house poor” life − a life without the discretionary income to take a vacation, eat out once or more a week or save for college. Economists believe homeowners should spend 30 percent or less of their income on housing. The “28/36 rule” is a good rule of thumb to follow when making your budget. Keep the percentage of your gross income that you spend on housing to 28 percent or less and keep your debt to 36 percent of your income or less.
Even buyers who budget can run into trouble, especially when caught up in multi−bid situations, which are common during these times of rising prices and shrinking supplies of homes to buy. When their hearts get ahead of their heads, some buyers bid beyond their means and end up with a mortgage they can’t afford.
A recent study by two researchers at the Federal Housing Finance Agency found that all buyers are overpaying by about $2,200 apiece. First-time buyers, who are inexperienced house hunters and are more likely to be marginal borrowers, overpay by substantially more.
Most buyers know that they will have to pay additional costs at closing. These can include the lender’s administrative costs, title insurance, settlement services, inspections, recording charges, and pro-rated property taxes. The “Know Before You Owe” regulations implemented by the Consumer Financial Protection Bureau two years ago require lenders to provide you estimates of these costs when they receive your mortgage application. Three days before closing, your lender will provide a second form that tells you the actual costs of closing services so that you can prepare for the closing. As a rough rule of thumb, closing costs will come to about 5 percent of the house’s price. Buyers can trim closing costs by shopping for their service providers, such as title companies, and keeping inspections to a minimum. Buyers should always apply to at least three lenders so that they can find one with the lowest administrative charges.
State and local property taxes vary every year. Listings include the latest assessments.
Electricity, gas, oil, and water can add several hundred dollars to your monthly costs. The costs of utilities as well as maintenance rise with the size and age of the house. Ask the owner for records of recent tax assessments.
Even if the house you buy is in great shape, you are going to want to do some redecorating after you move in to make it feel like home.
Of contracts that go to closing with settlement contingencies, 41 percent have problems with appraisals. Appraisals that come in lower than the sales price agreed to buy both seller and buyer are the most common problem. When an appraisal comes in low, either the seller or buyer must agree to concede the difference, or the deal will fall through. It’s a good idea to have up to 2 percent of the purchase price handy to cover any appraisal contingency.
Real estate brokerages traditionally charge a commission based on a percentage of the sales price. The commission is split between the sellers (or listing broker) and the buyer’s broker. Some work on a fee-for-service basis where the buyer pays for specific services, such as staging a house or listing a house on a multiple listing service.. Others work for a small commission and charge for extra services.
Lenders require borrowers to carry homeowners insurance for the life of the mortgage.
Borrowers who put down less than 20 percent of the purchase price are required to carry mortgage insurance, which protects lenders in the event of a default. When the property gains equity worth 80 percent of the original value of the home, most borrowers can terminate mortgage insurance. FHA borrowers can end their mortgage insurance either by refinancing with another lender or selling the house.
The cost of maintaining a house grows as the property ages. New refrigerators, air conditioners, roofs, plumbing, windows, and floors need replacing over time. Lawns, shrubs, trees, and driveways require constant attention. It’s a good idea to dedicate up to 3 percent of your home’s purchase price each year in separate savings account specifically for home maintenance and repairs.
Values generated on websites like Homes.com are good starting points for determining a home’s real value. No computer-generated valuation is as good as an appraisal by a professional appraiser. For a ballpark estimate of a home’s true value, check out the valuations on three sites and average them to get a good approximation of your home’s current value.
Do some research on these topics and create two budgets: your budget to buy a home and your annual budget after you take ownership. Refine them as you learn. Then stick to them diligently to stay ahead of your homeownership expenses. For years to come, you and your family will be glad that you avoided the stress of living “house poor.”