How Much Cash You Really Need To Buy A Home?
Ask your friends how much you need in cash in order to buy a house with a mortgage, and the first thing you will hear is, “You need about 10% of the cost of the house as a deposit.” The deposit or down payment is the amount you need to put up in order to get a mortgage these days. Banks and lenders are uncomfortable lending you money to buy a home if you are unable to buy at least 10% of the house on your own.
Though what your friend says is true, that 10% is simply not enough because it misses out a significant portion of your expenses. In fact, it will probably cost you two-thirds more than the cost of your deposit. This article explains the most common charges and fees that buying a house will include.
What Is The Point Of This Article And When Should You Use It?
There are two big misconceptions/urban myths that we are going the smash with this article. The first is that if you are buying a house, then all you need is a 10% deposit so that you may be pre-approved for a mortgage.
The second myth is that if you are renting a home, then you are better off getting a mortgage because your rent money is going to waste because it goes to other people. The idea is that you can use the rent money to pay your mortgage and then at least you are not wasting the money you spend on rent. Even though this idea is good in principle, it is actually not as smart of savvy as many people think.
A Run Down Of The Different Charges You Will Receive
There are numerous fees and charges you will have to pay when you buy a home. The first set of charges for your consideration are fees and charges that you simply cannot avoid in most cases. Let’s say you find a killer house and it is only selling for $100K because two old people died in the kitchen. Here, we break down how much you would actually have to pay to buy the house with a mortgage.
On a serious note, houses that are cheaper because people died in them are a steal. When you sell in a few years, the dead people stigma will be long gone and you will be rolling in profit. The idea of the neighborhood talking and keeping the stigma alive is almost dead. Communities of people coming together, gossiping, gathering, and looking out for each is dying off. Most people do not know their neighbors besides the ones they share a boundary/border with.
Down payment on $100K house is at least 10%
10% of $100,000 is an achievable $10,000
Closing costs average at around 2.5% of your mortgage price
2.5% of $90,000 is $2,250
Prepaid expenses usually come to around 2% of your mortgage amount
2% of $90,000 is $1,800
Utility adjustments are estimated at an average of $500
$500 for utility adjustment
Cash reserves for your first two mortgage payments
$1,200 payment x 2 is $2,400
Total cash needed
To be comfortable, even when buying a relatively cheap house, you need around 69.5% more than your initial 10% deposit. When your friends say you only need as little as $10,000 to buy a $100K house, then tell them they need closer to $20,000.
There are a few ways, such as asking your mortgage broker/lender for a six-month break on your mortgage before you start paying it, so that you may avoid the cash reserves cost.
You can ask the seller to waive the utility adjustment fees if you are feeling cheeky. It depends on how eager the seller is to sell. There are some that will happily give you the oil in the heater, the pre-paid housing association fees and so forth. Then there are sellers that won’t leave even leave light bulbs in the house.
You used to be able to lower the initial deposit in the bad old days before the global economic downturn, but those days are gone. In fact, if your credit score is not great, or your earnings are below average, they may insist on a larger deposit.
There are some sellers who offer to pay the closing costs for you when you buy a home. Such offers tend to come from people who are highly motivated to sell, or from businesses that are trying to increase the pace of their inventory turnover.
The Semi-Avoidable Costs You May Invest In
There are some costs that you may avoid, but experienced or cautious buyers may invest in these charges and fees to help protect their money. If you are buying a property, you are putting a lot of your capital into one thing, which means the stakes are raised. It may be worth paying a little extra to guard yourself against loss or lower your risk of disaster.
Do Your Research Before You Buy A Home
Invest time and money into learning more about the house. Here are just a few things you may learn by hiring/using certain services, and by asking around. It is not a comprehensive list, but it should give you an idea of the type of things you can find out.
- Is it on a flood plain?
- Was it built on top of mines?
- Has the house had subsidence work done on it?
- Did the previous owners buy for an unnaturally low price?
- Are the neighbors nice people?
- Does the smell from the paper manufacturing plant reach your house on warm days?
- When was the roof last redone?
- How old is the home?
- Has the name or number of the house changed?
- Has it been blacklisted by catalogue companies?
- Do the police have drug markers on the house because the previous tenants were dealers?
- Does the street fill with flies when the local farmers cut their crops?
- Has the neighbor has the local drain services out repeatedly because she pours her old goose fat down the toilet?
A Property Surveyors Report And Estate Agent’s Report
A surveyor will check the house for structural defects and they may also give your property a value/price based on what they find. In most cases, there are three types of report. There is a basic valuation where the house is checked for obvious defects and priced accordingly.
There is a “Homebuyers Survey & Valuation” where defects and property issues are highlighted in depth, and a valuation is created based on that report. Then there is the “Full structural” report that really goes into detail about the house. The full structural report is usually only ordered if a problem is found with the house and homebuyer wishes to see just how extensive the problem is.
Surveys, especially extensive ones, are a big inconvenience for sellers. However, they are likely to let you proceed because firstly they want to make the sale, and secondly, it helps them to know what is wrong with the house if they wish to sell it. You may also hire an independent estate agent before you buy a home to give his or her opinion on how much the house is worth.
Lawyer Costs And Legal Fees
Many of these are covered in your unavoidable fees, but there are some that are not. If you want added protection at any stage, from checking your mortgage agreement, to supervising escrow, to guaranteeing what the estate agent told you is true, then you will need to pay extra for a lawyer’s services.
Making The House Safe
Some call this “Bringing the house up to code,” but it often involves things that are not specifically covered by housing codes. For example, is the house safe for your child, for your dog, or suitable for your disabled family member? If you are planning to move into the house to live, then these costs may become unavoidable.
Making The House Livable If You Wish To Buy A Home
Typically, the cheaper you buy a house, the more work needs doing to it. You may need to decorate at the very least, though there is often more that needs doing. The garden may need clearing, the fences may need replacing, the heating system may be outdated, and so forth.
Investment Needed To Avoid Lawsuits
If you have watched enough Judge Judy episodes, you will probably budget a little money to help you avoid lawsuits when you buy a home. Problems may occur from all directions, from your apple tree dropping apples on you neighbor’s car and denting it, to the fact that somebody has sharpened the handle on your mailbox so that it cuts the postal worker.
Buying Home Insurance And Paying Property Tax
If you are going to invest a massive amount of money into one thing, then you need insurance. This is one of the money ongoing costs that people forget about when they say their rent money would be better spent on a mortgage. They forget that renters don’t need to pay for home insurance if they do not want, and they do not have to pay housing association fees, or property tax, and renters do not often have to pay for big repairs and maintenance where homeowners do.
Conclusion – We Have Only Touched The Surface
Each of the charges mentioned in this article could have their own article written about them. We have only touched the surface on the details of each expense.
For example, the amount you budget for utility adjustment may need serious research into what fees exist, how they may be lowered, and why the seller has bought two-year subscriptions to services when he knew he was selling the house next month?
For example, being pre-approved for a mortgage takes so much more than turning up with a 10% deposit, and there are numerous things you can do to improve your chances. We have an article called “How To Get Approved For Your First Mortgage”
If somebody tells you that you only need a 10% deposit to buy a house, then happily inform him or her that it will take almost double that to buy a house. If somebody says that your rent money would go better towards a mortgage, happily remind them of the great many expenses that go before buying a house, and remind them of the expenses that continue onwards after buying a house.