NEW YORK – The conditions seem ripe to become a first-time homeowner.
Real estate prices are tumbling, mortgage rates are at record lows and there are big tax credits on the table. All that might have you scrambling to assess whether you can afford to make the leap into homeownership.
That was the situation for 28-year-old Holly Dewar and her boyfriend last winter.
“We really wanted to get the most for our money, and the market timing seemed right,” said Dewar, who works in public relations. Her boyfriend, 29-year-old Kurt Spring, works in real estate finance, which helped facilitate the purchase.
They closed on a three-bedroom, one-bathroom home just outside Boston for $340,000 in January. But that price didn’t include a host of other costs, such as $4,000 in closing fees and $700 for a home inspection.
And before even considering such details, find out whether the mortgage down payment is a deal breaker; lenders are requiring more money up front as they tighten standards. For the less-than-ideal borrower, an array of new loan fees could be another hurdle.
So if you think it’s time to stop renting, here are some big and small costs to consider.
Cost No. 1: Getting ready
Start the process by polishing your credit report. While the cost can be relatively minor, it’s particularly important now that banks are being more selective about making loans.
The Federal Reserve says a March survey found half of U.S. banks tightened lending standards on prime mortgages in the previous three months, up from 45 percent in February.
“We’re in very uncertain times, and you’re asking for a very big amount of money. The lender is going to be looking very closely at the credit report,” said Jed Smith, a spokesman for the National Association of Realtors in Washington, D.C.
A higher FICO score also gives you greater negotiating power over the terms of the mortgage and, ultimately, the total cost of the loan. A stellar score ranges from 760 to 850, while scores below 640 might mean you have to pay a significantly higher interest rate.
You’re entitled to a free annual credit report from each of the three major credit bureaus. Getting your FICO score costs $15.95 at www.myFICO.com.
Cost No. 2: Down payments
Rates on 30-year fixed mortgages are at a record low of 4.78 percent. At the same time, more lenders are demanding bigger down payments of 20 percent or more, Smith said.
The upside of making a bigger down payment, of course, is that you’ll owe less money and get better terms on your mortgage. If your down payment is less than 20 percent, however, you generally need to pay for mortgage insurance. This could cost $100 or more a month depending on the nature of your loan.
You can find out the down payment your lender will require as part of the pre-approval process. This is typically a free service where a lender evaluates your financial situation and tells you the terms of the loan they’re willing to give you. It’s a good idea to get pre-approval before you start looking at houses.
“Being able to tell the seller you can do the deal strengthens your bargaining position,” Smith said.
Cost No. 3: Adding up fees
New fees introduced by Fannie Mae and Freddie Mac in the past year will likely push the price of a mortgage higher for many people.
The fees are based on credit profiles, the amount of the loan in relation to property value and the type of home you’re buying. As such, they’ll vary greatly depending on your personal situation, but could total as much as 3 percent of the mortgage.
In that case, you’d be paying another $3,000 for a $100,000 loan.
There are also standard closing costs to consider. These are service fees charged by the lender, and could cover items such as credit reports, appraisals, documentation and administrative costs.
The total expense will vary depending on where you live and your particular situation. According to Bankrate.com, the national average last year was $3,118 for a $200,000 mortgage.
Fees were highest in New York ($4,015) and lowest in North Carolina ($2,650).
Lenders are required to itemize all closing fees, so review them carefully. Some of the more standard fees might be negotiable.
Cost No. 4: Inspections
There are plenty of inspections to consider.
Holly Dewar and Kurt Spring, for instance, paid $700 for a home inspection after making a verbal offer. That price covered checks on the home’s structural integrity and heating and water systems.
“We wanted to make sure there weren’t any surprises,” Dewar said.
Your inspection costs will depend on the checks you want and whether your inspector offers comprehensive packages.
The seller might pay for inspections in some cases, but it’s more common for the buyer to foot the bill.
Other inspections might be for lead paint, pests or radon gas. Some of these checks might be required by the lender and included in the closing costs.
Cost No. 5: Maintenance
A common mistake for many new home buyers is focusing on the monthly mortgage alone. It’s easy to forget all the maintenance costs that come with owning a home.
“It’s one of the big revelations for people,” said Julie Longtin, of Re/Max Professionals in East Greenwich, R.I.
To start, your utility costs will likely go up significantly. As a renter, you might not even pay for water, heat or electricity. But they could be a big drain if your home is large or you have a pool or other feature that drives up utility bills.
There are bigger maintenance matters to consider as well, such as repainting the house periodically. You’ll also be on the hook for any repairs for your home.
“You don’t know what’s going to happen,” said Longtin. “And as the house gets older, it’s likely the maintenance fees will grow.”
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