Qualifying and being approved for a mortgage are only part of the financial responsibility of buying a home. There's also a host of closing costs that, as a buyer, you should expect. Affordability is a topic on the minds of today's buyers, so researching each of the following costs, large and small, is important.
1. Down Payment. This amount ranges widely depending on the dollar price of your home, but many financial experts recommend a down payment be at least 20 percent of the total cost of the house.
2. Credit Report and Score: Before you even think about buying a home, you need to verify the accuracy of your credit report and score. You may access your credit report three times a year for free at myannualcreditreport.com, but you generally must pay to view your credit score. This costs around $10 - $20.
3. Home inspection: It is imperative that you get a home inspection. Even newer homes may have hidden budget busters, such as termites, mold, or shoddy electrical work. Chances are your offer, unless you are buying "as is", has a clause that allows you to back out of the deal if the home inspection comes back unfavorably. A home inspection takes a few hours, during which you should be present, and costs around $300 to $500.
4. Loan Origination and Points: You may have agreed to pay "points" in order to get a lower interest rate. Think of this as pre-paid interest. For each point purchased, the loan rate is typically reduced by 1/8%. An origination fee is what you must pay the lender to write and process your loan. This can be up to several thousand dollars.
5. Appraisal: An appraisal protects your lender from investing in a property that is over-priced. That means if the home appraises for $200,000, but the seller wants $225,000 ... you will only be able to get financing for $200,000. An appraisal also helps you to know the real market value of the home you are interested in.
6. Private mortgage Insurance: According to the Federal Reserve Bank of San Francisco, "PMI is extra insurance that lenders require from most homebuyers who obtain loans that are more than 80 percent of their new home's value. In other words, buyers with less than a 20 percent down payment are normally required to pay PMI." PMI protects your lender if you default on a loan, something that weighs heavily on the minds of lenders in today's economic climate.
7. Notary fees. Some states have a cap on the amount a notary may charge, while others don't. But you should generally expect a fee less than $10.
The good news? Your lender and real estate agent will provide a "good-faith estimate" of your expected settlement costs. Planning ahead for these expenses is important, and it is another reason to examine whether or not you can truly afford to buy a home at this time.
Carla Hill Realty Times February 24, 2011