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“As a Realtor, one of the biggest surprises I see homebuyers face is all the extra expenses required to actually get into their new home,” explained Rachel Stringer, real estate agent at Raleigh Realty. “These costs go way beyond the down payment and monthly mortgage.
“Many buyers focus solely on saving up for those big-ticket items without realizing there are a bunch of smaller fees and upfront costs that can really add up.”
What other costs do you have to budget for, as you prepare to buy your first (or next) home? Start saving your pennies for the following expenses, large and small.
Closing and Prepaid Costs
“You didn’t think you’d get through a real estate transaction without paying any closing costs, did you? These fees cover everything from the lender’s processing charges to title insurance, taxes, and attorney costs,” Stringer said.
“In total, closing costs often range from 3%-6% of the home’s purchase price. On a $300,000 house, that could mean ponying up $9,000-18,000!”
Kerry Sherin, consumer advocate at Ownerly, expanded on the closing costs you should expect.
“These expenses include appraisal fees, home inspection fees, title insurance, attorney fees, prepaid property taxes, homeowners insurance, and loan origination fees.”
Cash Reserves
Mortgage lenders don’t want to risk their money on a borrower who had to scrape every last penny out from under the couch in order to get to the settlement table. Those borrowers are one car repair away from financial disaster.
Real estate broker Colten Claus at 8z Real Estate explained it like this: “Lenders often require buyers to have cash reserves equivalent to two to six months’ worth of mortgage payments. This reassures them that the buyer can cover their mortgage payments in case of financial setbacks.”
They’ll ask to see proof of these funds in the form of bank statements.
Moving Costs
You’ve moved before, so you know the drill — moving costs money.
“Once you’re done with the deal closing and all the formalities are concluded, the main part is the shifting from your old house to the new one,” said Hannah Jones, Realtor and home improvement expert at NewBuildHomes.org. “This is a costly endeavor because it’s almost like packing up your whole life and transferring it to someplace new.”
You can do it without professional movers, but that means enlisting friends and family, and hoping they don’t break your furniture and artwork. Or you can hire help, but prepay to pay.
“Different companies charge different amounts so you need to have a budget for this. Furthermore, boxes, packing materials and equipment rentals also require money.”
Furniture and Decor
You may have enough furniture and artwork to serve the needs of your new space. Or you might not.
Consider buying used furniture through local marketplaces or classified services to save on these costs.
Initial Repairs
Jones goes on to note that unless you buy a brand new home, you’ll probably pay something to touch up and personalize your home as you settle in.
“No house is perfect, wherever you move, I am 100% sure you will face some sort of issues where you need to perform repair and maintenance activities. Painting, flooring, and adding a personal touch by buying new furniture or appliances are some activities that require cash, and that a person moving into a new home is bound to perform.”
Ongoing Maintenance and Repairs
Everything in a house breaks, rots or wears through sooner or later.
From minor maintenance such as periodically repainting to major repairs like replacing the roof or furnace, you need to budget every month for home updates so you don’t get blindsided by them.
“Unexpected expenses are inevitable,” Claus said. “Having a financial cushion for these surprises is crucial to avoid financial strain.”
Comfortable Cash Flow for Everything Else
After paying your mortgage each month, you still need plenty of money to pay every other bill. Those include everything from transportation to groceries, entertainment to gifts.
And most importantly, it includes your savings rate.
Eleanor Campbell, senior Realtor working with ContractorBond, explained the debt ratios that mortgage lenders use.
“Your monthly housing costs should not exceed 28% of your gross monthly income, and your total debt payments (including housing costs and all other debt payments) should not exceed 36% of your gross monthly income. This means that aside from the down payment and mortgage, you should have enough income to cover all other expenses comfortably.”
Remember those are the upper boundaries, not your target. The less you spend on housing, the more you can put toward building wealth and having fun.
Stringer has seen families derailed by bad budgeting for a home purchase.
“I had one couple who had budgeted so diligently for a 20% down payment, only to be completely broadsided by over $25,000 in closing costs, moving fees, repairs and upgrades. They were unprepared and very nearly had to walk away from their dream home at the last minute due to draining their entire life’s savings.
“It was an enormous source of stress that could have been avoided with better planning.”
Would-be buyer beware.
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