As a real estate professional, you want to do everything in your power to help your clients have a positive experience when buying a house. One effective way to do this is to make sure your clients understand all of the costs that are commonly associated with purchasing a home.
For instance, while a lot of emphasis is placed on a down payment – your clients might have already told you about how they’ve been saving for their down payment for years – there are many overlooked yet crucial costs involved with buying a property.
There’s a good reason why potential home buyers focus so much on a down payment: It’s probably the most common and well-known up-front expense. In a nutshell, a down payment is a lump sum of money that a buyer will “put down” on the home in order to to buy it. In general, the larger a down payment is, the lower the home loan amount will be for your client.
Many people believe that they need to have a down payment of 20%, and this is mostly true for conventional mortgages obtained through banks or credit unions. Understandably, this can cause many potential home buyers to wonder if they will ever be able to save up enough money to purchase a property. For instance, a 20% down payment on a home listed for $450,000 comes up to $90,000, which is not exactly a small or easy amount of money to save up.
Fortunately, down payments can sometimes be as low as 3% of the listed price of the home. In most cases, it’s not a number that is pulled out of thin air, but is determined by the type of loan program your client is using. In general, a conventional loan program can require a 3% down payment (depending on the lender). A loan backed by the Federal Housing Administration (FHA) often requires 3.5% down. If your client qualifies for a loan backed by the Veterans Administration or the United States Department of Agriculture might not requires any down payment.
Learning that the 20% down payment requirement may be off the table can be a huge relief to your client. At the same time, there are definitely pros and cons to this news.
Let’s start with the possible benefits:
And now, the cons:
Now that we’ve looked at down payments and what they entail, it’s time to move onto other costs that are associated with buying a home, starting with closing costs.
Closing costs are one of those terms that many buyers have probably heard before – especially if they have watched any shows on television about buying a home – but they might not be able to define it, or understand how much they might want to have set aside.
As the name implies, “closing costs” is a blanket term that refers to additional fees to be paid when your client signs their name on the dotted line and finalizes the mortgage. The closing costs are in addition to the down payment.
Like the down payment requirement, specific closing costs are often determined by the type of loan program your client has qualified for. They are often around 3% to 6% of the total loan amount.
Closing costs on a home can include:
We’ve covered the down payment, and closing costs. But as the saying goes, “But wait, that’s not all.” Let’s finish up by looking at several more costs associated with buying a home.
If your clients have fallen in love with a home in a planned neighborhood or community, they may have to pay a homeowners association fee. This HOA fee might be assessed monthly, bi-annually or annually and covers the following:
If your clients’ new home has an HOA fee, knowing how much it is and when the next payment is due will be helpful for their financial planning.
As mentioned earlier, if your clients are buying a home with less than 20% down, they will need to buy private mortgage insurance. In most cases, it will be added to the monthly mortgage payment.
Before they get the keys to their new place, your clients will need to provide proof of homeowners insurance. In some cases, this amount is added to the monthly mortgage bill, with funds directed to an escrow account for that purpose.
Other costs, fees and bills that are part of buying a home include things like:
It may seem overwhelming at first to realize that a lot more than a down payment is required to get that coveted set of keys. But rather than being unpleasantly surprised along the way, taking a proactive approach can really help.
Ask your clients if they're aware of the extra costs involved wtih buying a home and if they know the down payment they want to put down. With that information, you'll be able to successfully guide your clients through one of the most exciting and rewarding times of their lives.
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