The hidden costs associated with buying a home can add as much as 20% to the base cost of a new or resale house. This can make a crucial difference in your continuing ability to keep up with mortgage payments. When making your offer to the seller, make sure that your financing or cash resources include enough leeway to meet some or all of the following additional costs.
Real estate commission
Typical real estate agent commissions are usually between 2 and 6%. In some home sales, the seller absorbs this percentage. In others, meeting the agent’s commission is the buyer’s responsibility or divided between the seller and the buyer. It is possible to buy a home without involving a real estate agent, but it will still involve a minimum of several hundred dollars in listing and advertising costs and is not recommended for the inexperienced.
Real estate legal fees
Hiring a specialized real estate lawyer to help you through the legal quagmire is a wise choice. In some markets, hiring a real estate lawyer is mandatory. Even where the real estate agent normally handles all the legal paperwork, you can save big money by hiring a lawyer to double check all contracts and adjustments, especially because many real estate agents are legally required to protect the interests of the seller only.
With some competitive shopping, you should be able to keep your legal fees for buying a home under $1000, or slightly higher if they also include a title search. If you are only looking for a notary to register a mortgage or title, it should cost you less than $600.
After real estate agent commissions, taxes are easily the highest costs associated with buying a home. However, they vary greatly from region to region and even from year to year, so it pays to do your research before committing to a major move. First time homebuyers and resale homes may be exempt from some taxes.
As a loose rule of thumb, property transfer taxes range from an almost non-existent 0.01% (in Colorado) up to around 4% in some large urban areas. Property transfer taxes may be levied by state, county, city, or all of the above. In some cases, the property transfer tax may be scaled, with the higher rate applying only to that portion of the property which is over a certain value.
The United States has no sales tax on the sale of properties. However, in 2010, the US enacted legislation linked to the Patient Protection and Affordable Care Act which will levy an investment income tax of 3.8% on real estate sales, starting in 2013. This is not a sales tax. It is also not calculated dollar-for-dollar. It will be applied only on the portion of profit on the sale of a home which exceeds $250,000 ($500,000 for joint taxpayers), and does not apply at all to those earning less than $200,000 ($250,000 for joint taxpayers). The Tax Foundation estimates that this new provision will affect only the top 2% of all families. This does not directly affect the cost of buying a home, but it may be a negotiating point when making an offer.
Some sales are conditional upon a new land survey of the property. A professional land survey usually costs between $1000-2000. The cost may be paid by either the buyer or seller.
Errors in the public registry, previous surveys, or even undisclosed heirs in a distant estate dispute can complicate ownership issues. Title insurance can protect your interest from unexpected disclosures after contract closing. It usually costs around $300.
Mortgage default insurance
This is also sometimes known as mortgage insurance. In case you are unable to meet your payments, mortgage default insurance protects you against having to make up the value difference between what the forecloser can get for your property and what you still owe on it. It does not protect your ability to make your payments in case of accident, illness, unemployment, or other financial emergency.
Some markets will require you to purchase mortgage insurance if you take out a high-ratio mortgage with a down payment of less than 20% of the base cost of the home. In other markets, mortgage insurance is optional. Depending on the market, region, and legal requirement, mortgage insurance will usually run between 1-2.75% of your total mortgage.
Home inspector’s fee
Compared to the other hidden costs associated with buying a home, home inspection usually only runs around $300 to $600. However, these few hundred dollars may end up saving you thousands of dollars of grief. It is worth your while to find a well-recommended home inspector with solid experience in inspecting homes, not simply someone who has passed the necessary courses and hung out a shingle.
Some contracts may be conditional upon additional inspections. A very common condition for resale homes throughout much of the United States is termite inspection.