For most people looking to buy a home in Tampa, the first question is, "can I afford it?" With the various mortgage loan programs available, your answer will likely be "yes," especially if you are only considering the purchase price, down payment, and monthly repayments.
However, there are out-of-pocket costs that often catch homebuyers off guard. And even with mortgage programs that offer zero or low down payment, it's still likely that you will have to cover some upfront fees.
So to help you prepare, we've listed the most common out-of-pocket expenses to look out for when buying a home.
1. Earnest Money
Earnest money is a deposit made by a buyer to show how serious they are in purchasing a house. It is usually 1-2% of the property price, but it can vary depending on the current market.
This out-of-pocket expense can be included in the offer or delivered when the sales contract is signed. Earnest money allows you to reserve the house you want while processing the mortgage or other paperwork.
You do not give earnest money directly to the seller but to your broker or realtor, who then keeps it in an escrow account until closing. When the purchase is finalized, the earnest money is applied to the down payment or closing costs. If the transaction falls through, and it's not your fault, then the escrow company will return your earnest money.
2. Home Inspection
Although a home inspection is not mandatory, it can save you a lot of money in the long run. A home inspection should be performed after the seller accepts your offer and before going to closing. Hiring a certified home inspector helps ensure that the house you are buying is worth it.
A home inspection can be used as a contingency in your sales contract. A contingency means that if the issues you found are too significant or too expensive to fix, then you can opt to back out without any repercussions.
Another value of a home inspection is giving you a chance to negotiate the repairs with the seller. You can ask them to fix it, provide you with cash at closing to fix it yourself, or have them reduce the purchase price. Otherwise, you'll be handling all of the costs for the repairs.
3. Down Payment
The down payment may be the biggest upfront fee that you'll have to settle upon closing. A down payment means you'll be paying a certain percentage of the purchase price, depending on the mortgage program you qualified for.
VA and USDA loans might offer 0% down payment, but they have strict requirements. VA loan only applies to military personnel and their families. And a USDA loan is restricted to houses located in rural areas.
The most common loans that are available for the general population are FHA and Conventional loans.
An FHA loan requires a 3.5% down payment if your credit score is 580 or higher. But if your score is lower than 580, then you will have to pay 10% down.
With a Conventional loan, you are required to have a minimum credit score of 620 to take advantage of the 3% down payment for first-time homebuyers. For experienced buyers, you need to make a 5% down payment.
4. Closing Costs
Closing costs are expenses you pay for setting up the mortgage loan. Closing costs usually amount to 2-5% of the purchase price. The closing costs vary depending on the size of the loan, the use of an attorney during the closing, and other fees that your city or state charges.
All of the items included in the closing costs are listed in the loan estimate and closing disclosure. Here are some of the fees that you can expect to see:
- Application Fee: Fee charged by the lender for processing your loan request.
- Attorney Fee: Fee charged by a lawyer for reviewing contracts and agreements.
- Closing/Escrow Fee: Fee paid to the title company or the escrow company that's handling your earnest money.
- Credit Report Fee: Fee charged by the lender for obtaining your credit report.
- Homeowners' Association Transfer Fee: A fee covering the transfer of ownership of a house included in a Homeowner's Association.
- Homeowner's Insurance: Lenders require you to pay the first term of homeowner's insurance premium upon closing.
- Lender's Title Insurance: A one-time expense paid to the title company to protect the lender from financial loss if a dispute arises with the property's title.
- Owner's Title Insurance: An expense meant to protect you from losses if there's a problem with the property title.
- Origination Fee: Usually 0.5 to 1% of the loan amount, the origination fee is a cost charged by the lender for processing your loan.
- Property Appraisal Fee: Fee charged by a property appraisal company to evaluate the home's fair market value.
- Property Tax: Fees charged by the state or local authorities to fund sewer maintenance, local schools, and other municipal services. At closing, you are required to pay property taxes due within 60 days of purchasing your home.
- Recording Fee: Fee charged by the recording office for keeping the public land records.
- Survey Fee: Fee charged by a surveying company for checking property lines.
- Tax Monitoring and Tax Status Research Fees: An expense you pay to a third-party to notify your lender of any issues with your property tax.
- Title Search Fee: An expense paid to the title company to search for any property ownership discrepancies.
- Transfer Tax: Tax for transferring the title from the seller to the buyer.
- Underwriting Fee: A fee paid to the lender for verifying your financial information. An underwriter determines how risky it would be for the lender to give you money.
Additional Out-of-pocket Expenses To Prepare For
- Cash Reserves: Lenders may require you to have enough money in your bank account to pay for at least two months' worth of mortgage payments.
- Moving Expenses: The cost needed for moving depends on the distance between your old and new homes, and how much stuff you're taking with you.
How to Reduce Out-of-pocket Expenses
It is understandable if you get overwhelmed with the upfront fees you have to pay when buying a home. Thankfully, some methods can help you reduce these costs.
- Choose Your Mortgage Wisely: If you are qualified, apply for the mortgage programs with lower or zero down, such as USDA or VA loans.
- Down Payment Assistance: Each state offers down payment assistance programs for homebuyers with low to moderate income.
- Use Gift Money: With most mortgage loan programs, you can use gift money for the down payment. There should be no problem with this method, as long as your gift money can be properly tracked and accounted for.
- Seller Concessions: You can negotiate with the seller to pay the closing costs. This agreement is called "seller concessions." The seller can help you pay for things like inspection, realtor, attorney, or appraisal fees.
- Lender Credit: You can ask your lender for a "lender credit" where they will pay some or all of your closing costs in exchange for a higher loan rate.
Why Is Understanding Out-of-pocket Expenses Necessary?
By having a better understanding of upfront costs, homebuyers can gauge their financial condition and determine whether they are ready to purchase a home.
Call our mortgage brokers today to learn more about home loans or to get help with the homebuying process. Contact us at (813) 284 - 4027 and let us help turn your dream home into a reality.
