A first time homebuyer’s guide to hidden costs

There’s nothing like falling in love with your first home.

From visions of family dinners in an open-concept kitchen and neighborhood gatherings in a manicured backyard, to choosing the right decor, making a first-time home purchase is certainly the American dream. Yet, many first-time homebuyers are surprised to learn of the hidden costs, above and beyond the cash required for a 5-10% mortgage down payment, associated with fulfilling their dream of homeownership. But, what if there was an innovative way to buy a first home without the burden of these hidden costs? At Ownify, we’re making this possible by reimagining the path to homeownership to make it achievable for the next generation of homebuyers.

First, let’s take a look at the 11 most common costs associated with purchasing a home and then we’ll discuss how buying a home is attainable without the extra fees.

Closing Costs

The purchase and sale agreement is signed and the feeling of being on top of the world has taken over (cue the confetti). But wait – now it’s time to review the closing costs. The list of fees required to complete the purchase may catch many first-time buyers by surprise. First of all, these costs are not part of the listing price of the home and must be paid to administer the sale on the closing date. From underwriting and deed recording, to credit report charges, taxes and origination fees, these costs can quickly escalate above the property’s listing price and should be factored in advance into a buyer’s overall budget. Typically, closing costs are between 2-5% of the purchase price.

Earnest Money

If only genuine enthusiasm was enough to seal the deal before closing day, but, unfortunately, earnest money is often required. Similar to a security deposit, earnest money is sometimes referred to as a good faith deposit that the buyer puts down before any paperwork is completed. This fee is typically around 1-3% of the purchase price and is kept in an escrow account until the deal is finalized. The good news is that earnest money goes toward the down payment or closing costs if the purchase goes through, but it also serves as a safety net for the seller if the buyer backs out.

Due Diligence Fee

If a prospective buyer is new to the Triangle area, they may wonder what a due diligence fee is. This is a fee customary to North Carolina that is due at the time of the real estate sales contract, which is an agreement signed by both parties that includes terms such as house price and closing date, along with the above-mentioned earnest money. Typically, this negotiable fee is in a similar range to earnest money, but over the past few years it has increased to 5-20% of the price of the home, and it coincides with the due diligence process, which is the specific time period that a buyer takes to learn about the property through appraisal, inspection and insurance planning. Similar to the earnest fee, due diligence money displays a buyer’s serious intent; however, unlike earnest money, due diligence goes directly to the seller and compensates them for the time the home was off the market in the event that a buyer backs out for any reason. If the buyer goes through with the deal, the due diligence fee is ultimately credited toward the purchase price.

Property Taxes

Property taxes are perhaps a more commonly known expense in the home purchase process but it’s still important to keep them in mind when running the numbers. Property taxes are different in each city and county, and are worth looking into before landing a deal. Many times, these taxes are rolled into the monthly mortgage payment and they can even create another surprise in the form of a supplemental tax bill at the end of the first year of home ownership if the county determines that the house was undervalued at the time of sale. In a hot market where property value is on the rise, accounting for increasing property taxes is important.

Mortgage Origination Fees

When a lender processes a home loan, they charge a mortgage origination fee. This fee covers the processing of the loan as well as documentation collecting, filling out paperwork and underwriting the loan, which is the process in which a lender verifies that an individual qualify for the loan by evaluating assets, debt, income and property details to finalize the loan. A mortgage origination fee typically ranges between 0.5-1% of the loan amount and is usually paid with closing costs.

Homeowners Insurance

Homeowners insurance is one of those fees that can’t be avoided when purchasing a home through a lender. While lenders require this insurance to protect the value of the investment,  even those purchasing with cash should have homeowners insurance, as it can cover the cost of major repairs caused by disasters as well as injuries that take place on the property. From home location and risk exposure, to aspects such as square footage and bedroom count, insurance prices are determined on a variety of factors as well as the specific insurer.

Mortgage Insurance

Let’s take a look at private mortgage insurance (PMI) and how it can increase homeowner fees. If the buyer’s down payment is less than 20%, mortgage insurance is typically required to protect the lender in the event the buyer defaults on the loan. Also, FHA loans require a mortgage insurance premium (MIP) regardless of downpayment. PMI can be included in a monthly mortgage payment or may be paid in full at closing. 

Inspection Fee

This fee can actually save a prospective buyer in the long run. Even if a dream home appears to be everything and more, a professional inspection is recommended to check for major repairs or issues lurking beneath the surface. Most home inspections cost between $300 to $800, and allow purchase contracts to be contingent on a positive home inspection, giving the opportunity to back out if any issues are found. Although, there are circumstances when an initial inspection prompts further investigation, as a visible inspection of the readily accessible aspects of the property do not always paint the full picture. For instance, further testing by a specialized professional may be required, such as radon testing, mold inspection or foundation inspection. All of these evaluations can significantly increase the amount of fees incurred. On the other hand, this may allow for further negotiation power on making repairs or lowering the home price. 

Appraisal Fee

Any lender originating a mortgage will require an appraisal to ensure that the home is worth the amount a buyer is willing to pay. This means yet another hidden cost of the home-buying journey, as this fee is typically around $300 to $400. An appraisal is generally required when applying for a mortgage loan and often determines the home’s property taxes, and ultimately, it protects a buyer from purchasing a home for more than it’s actually worth. Licensed professionals consider a number of factors in the appraisal process, such as location, size, type of home, covered garages, and more.

Maintenance Costs

Buying a home for the first time is a special experience, but when considering the hidden costs of homeownership, don’t forget to factor in maintenance and repairs, which experts recommend budgeting for at least 1-3% of the home purchase price. These maintenance costs might add up before the moving truck is packed, as a home inspection may reveal costly repairs from the start. While every situation is different, the seller is not required to cover the cost of repairs found during inspection. If a buyer unable to reach an agreement with the seller to make the repairs or provide concessions to cover a portion of the cost, or if a buyer is not able to pay for such repairs, forfeiting due diligence and inspection fees and walking away from the deal might be the only option. In addition, having an emergency fund is important when embarking onto this journey, to relieve the burden when unexpected home issues arise. Whether it’s a leaky pipe, a broken air conditioner or something as significant as a roof repair, home repair costs can quickly add up. In fact, one report found that 47% of those experiencing homeownership difficulties said it was due to maintenance and upkeep.  If a buyer is thinking about purchasing an older home, these maintenance costs may also be higher.  Read more about maintenance costs for older homes here.

HOA Fees

Homeowners Association (HOA) fees often accompany homes that are in planned communities. They are paid monthly or annually to cover landscaping, community amenities, trash removal, repairs and other neighborhood upkeep and improvements. HOA fees are typically collected monthly but sometimes they may be due at the start of the year. The exact cost varies by community but it’s important to know if a home requires HOA fees, as the national average HOA fee is $170 per month. 

The list of hidden costs that may surprise first-time homebuyers is lengthy and will require more upfront cash to buy a home. In fact, we recommend budgeting at least 5% of the purchase price to cover these fees, which is in addition to the required down payment, bringing the total estimated cost up to at least 10% of the purchase price needed in upfront cash when buying with a mortgage. From closing costs and insurance to real estate taxes, budgeting to make a big move takes some planning and guidance to be informed. At Ownify, we’re reimagining the process. Find a dream home in the Triangle area that’s within budget, prepare for a 2% down payment and allow our team to make an enticing cash offer that brings the dream of homeownership to life on closing day, with 2% equity ownership as soon as the deal gets signed. 

Some may be wondering – what about the host of hidden costs? Ownify covers closing costs, taxes, insurance, home repairs, due diligence fees and earnest money, and doesn’t require anyone to pay for appraisals or loan origination fees that a mortgage provider would require so you won’t have to worry about uncovering any mysterious costs. By partnering with Ownify, you receive a fixed monthly payment schedule for five years that allows for clear budgeting, and the opportunity to build approximately 10-15% in equity ownership during that same time. Learn more about how to buy your first home without the extra fees.

If you're ready to get pre-qualified then apply now here.

If you would like a quick check on your eligibility for Ownify, use our tool here.