In a housing market where almost half of U.S. homes sell within a week and prices are climbing at a rapid clip, it’s easy for a buyer to overlook hidden costs in the quest to land a new home.
That’s all the more reason buyers - especially first-time buyers - should step back, breathe and consider all the costs involved, experts say.
In addition to a down payment, which most financial experts say should ideally be 20% of the home’s price, buyers need to set aside closing costs.
Those typically include lender fees to originate and underwrite a mortgage, real estate agent commissions, appraisal, property taxes, homeowner’s and title insurance, as well as fees for filing local and state records.
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“Generally, financial planners say that you should expect to pay somewhere roughly between 3% to 5% of what your mortgage amount is,” says Jessica Menton, a USA TODAY personal finance and markets reporter.
For a $300,000 mortgage, that means setting aside $9000 to $15,000 for closing costs.
If you’re taking out a mortgage, your lender will provide a document detailing closing costs. Examine that document carefully, advises Bill Gassett, a real estate agent in Hopkinton, Massachusetts, who has worked in the business for more than three decades.
In some cases, a buyer can ask a seller to cover some items. But sellers themselves usually fork over more than 5% of the total sale price in real estate agent fees, commissions and other expenses, Menton says.
With most homes selling for well over the asking price, fewer sellers are likely to say yes, though they may negotiate if a buyer is offering at least the full asking price, Menton says.
“Choose those battles wisely,” Menton says.
Other costs can also crop up.
Some experts recommend buyers hire an independent inspector, even though sellers will hire one to look for major issues like pests or mold before listing their property. Fees can be up to $400, according to HomeAdvisor.
When making an offer, buyers typically submit 1% to 5% of the home’s value “in earnest” so the seller feels comfortable pulling the home off the market, according to the National Association of Realtors. That fee is usually held in escrow and applied to closing costs, Menton says.
If the home is part of an association, get details on not just the monthly fee, but also any upcoming special assessments. That’s money required for major repairs or improvements, like a new roof or heating system.
“Most people know that there's a condo fee or an HOA fee, but they may not notice a special assessment coming up, where all of the sudden there's a big extra expense,” Gassett says.
As part of closing, lenders get the home’s value appraised. Because home prices are rising so fast, the difference between asking price and appraised value can now reach into the tens of thousands, Gassett warns. That difference can put ardent buyers in a “conundrum,” he says.
“The bank's not going to do the loan unless the buyer puts more money down,” he says. “So a lot of buyers are being forced to actually bring more money to the table than they thought they needed.”
If it’s all too much, Menton suggests buyers hire a lawyer to steer them through closing. Though it’s an additional cost, a good lawyer can bring peace of mind and help avoid pitfalls. Look for a lawyer who is familiar with buying situations similar to your own, Menton says.
“They'll help you negotiate any issues that come up over the course of, say a home inspection or trying to secure your mortgage,” Menton says.
Rachel Layne is a Boston-based freelance journalist. Her work has appeared in the Boston Globe, CBS News, HBS Working Knowledge, USA TODAY and other publications. She previously spent two decades covering multi-industrial companies for Bloomberg News.
This article originally appeared on USA TODAY: Buying a home: Hot real estate isn't an excuse to forget hidden costs