When it comes to buying your first home, two questions typically surface: “how much do I need for the down payment?”, and “how much can I afford per month?”.
Many people think having their down payment in the bank and making enough to cover the monthly payment is all that’s needed, and in a way you’re right, but there’s more that should be expected in your initial planning.
When purchasing a home there is a wide variety of down payment options ranging from 0% (down payment assistance), to 100% (cash). Once you know what you qualify for, you’ll know what your down payment options are.
In addition to your down payment, you’ll also need to have some cash set aside for loan costs / prepaid items.
Loan costs may include:
- origination fees (from lender / bank)
- appraisal fee
- title company fees
- HOA costs (if applicable)
- Property-specific reports / inspections required (ie, engineers certification on manufactured homes)
Prepaid items include:
- Home insurance policy (one year, paid in advance)
- Per diem interest (to get through the month you close in)
- Escrow cushion (for property taxes / future home insurance costs to be paid through your mortgage payment)
A good rule of thumb when you’re trying to anticipate loan costs / prepaid items is take 2% of the home value as a rough estimate (ie, a $400K home would have roughly $8K in costs / prepaids)
Aside from down payment and costs / prepaids, what other expenses should you plan for? These next few will depend on each person going through the process but are worth a mention:
- Moving Costs (will you be hiring movers, or buying pizza and cold drinks for your friends & family?)
- Home Inspections (always recommended – ask your realtor or lender for a reputable home inspector, who will come out and search for any issues with the property that you may not see)
- Missing Items (you unpack and notice that you don’t have a waffle iron or coffee maker nearby…And how can anyone live without coffee???!!!)
Sidebar: In my experience, the first home I bought didn’t have ceiling fans installed, so I had to go buy three of them, and have electric ran to the junction boxes in each room. We also needed to get a fridge, and washer / dryer set…
All of this to say that planning ahead will save you not only money, but a lot of unnecessary stress.