Finurah will be bringing you a series of articles discussing the difficult choices associated with purchasing a home. Homeownership is one of the main ways to build generational wealth and to help close the racial wealth gap. But it takes more than a mortgage to buy a home, and Finurah will help you prepare for future homeownership.
Often when someone thinks about purchasing a home, they think about having enough money to cover the down payment, keeping their debt-to-income ratio low and having a stable credit score. However, there are several other costs that homebuyers must take into consideration and prepare for that need to be paid for before closing day.
When a homebuyer receives the loan estimate form, it is crucial to review the loan costs section. Here a homebuyer will discover that the lender charges at least one to four percent of the loan amount. That means a house that costs $500,000 will have a loan origination fee of at least $5,000. This is known as an origination fee. Found in the fine print of the initial mortgage process, it may include expenses such as an application, processing, verification and rate-lock, underwriting and administrative fees. A homebuyer will be expected to pay these fees at closing.
One of the most significant expenses associated with purchasing a home is the down payment. For FHA loans, a purchaser will need at least 3.5 percent of the total cost of the loan, while conventional loans will call for three to 20 percent. Therefore, if a homebuyer purchases a home for $300,000 using an FHA loan, the down payment will be a minimum of $10,500.
Private Mortgage Insurance (PMI)
If a homebuyer makes less than a 20 percent down payment, the lender will apply a mortgage insurance premium, known as PMI. The purpose of PMI is to protect lenders — not the homebuyer. If the homeowner stops making payments, the PMI will be supporting the needs of the lender.
In addition to conventional loans that require less than a 20 percent down payment, all FHA and USDA loans require mortgage insurance. PMI is a fee that is included in a loan and monthly payments. Therefore, if PMI is included in a mortgage, the loan payment will be higher.
The purchasing process also includes a home inspection that will ensure that the home being purchased is in optimum shape. During a home inspection, issues such as the home’s foundation are evaluated, the roof is assessed for leaks and electrical problems are identified. The house is tested for termites as their presence can cause severe damage to a home and lower its value. A home inspection also includes testing for mold, a costly expense for a homeowner to cover. The cost for a home inspection varies from $100 to $300.
When purchasing a home, a mortgage lender will always require an appraisal of the property. An appraisal includes an onsite inspection of a property. Then, an appraiser will compare the home to other properties within the local market to identify its value. On average, an appraisal can cost between $300 to $450. However, in areas with higher living costs, the cost of an appraisal can be higher.
All mortgage lenders will require purchasers to possess a homeowner’s insurance policy before closing. Homebuyers are expected to pay at least six months to a year of the premium to protect the property if a fire or flood occurs. According to Bankrate, the average cost of a homeowner’s insurance policy was $1,300 per year.
Real Estate Agent Commission
Real estate agents are resourceful and insightful. They can help homebuyers find the best property that will meet their budgetary and familial needs. But real estate agents also come at a cost. Real estate agent commission is at least six percent of a home’s purchase price. According to Redfin, the realtor will receive 2.5 to 3 percent of the commission, with the seller’s agent taking the remaining 2.5 to 3 percent of the commission. For example, if a homebuyer purchases a home for $450,000, the agent commission will be $27,000.
If a homebuyer is using a realtor, there is a possibility that they will have to pay this fee. However, sellers traditionally pay the realtor fees.
In addition to the fees listed, there are other costs associated with the homebuying process. These include escrow fees, deed transfer and attorney closing fees.