Doing the numbers

#112 in a series of true experiences in real estate
March 1995, Hills Newspapers

You want to buy a house. How much money will you need? Figuring that out can be a bear.
It is usually fairly easy to determine the maximum amount of money you can borrow, and this will tell you what price you can pay for a house and also what down payment will be required. But you’ll need more money than that.

There will be closing costs, inspection fees, possibly money for repairs, and moving expenses. How much altogether? The total will have to be revised a number of times as you go along.

You start by talking to an agent. Maybe you say, “My grandmother died and left me $30,000, and I’m hoping that I can buy a house. Do I have enough money?”

Your agent says, yes, it sounds like you have enough but to know more, you’ll need to talk to a loan broker.

You call the broker your agent recommends and you tell her about your income, debt, and credit. She tells you about different types of loans, down payment possibilities, and interest rates. Together you decide what kind of loan will probably work best for you.

She says that, based on what you’ve told her, you can buy a house costing up to $200,000. You would borrow $180,000, your down payment will be $20,000, and your closing costs will be around $6,000 to $8,000.

“If it’s $8,000, I’m going to be cutting it pretty close,” you say. “Can’t you be more exact?”

It’s a problem because there are so many variables. Closing costs include fees connected to getting a loan, city transfer taxes, money that the title company charges for handling your escrow and insuring title.

You may also be paying “points” to get a lower interest rate and the lender may require that you have extra money (“reserves”) set aside to pay property taxes and insurance when they are due.

If your down payment is less than 20 percent of the sales price, you may also be required to prepay some mortgage insurance.

“And how much will it cost me to live in this house?” you want to know. A reasonable question, but the exact answer isn’t available yet.

Both your agent and your loan broker will estimate for you, saying something like this: “If you get a fixed interest loan, assuming interest rates stay the same, if you are paying Oakland property taxes, and depending on how much your homeowner’s insurance costs, it will cost you around $1750 a month to live there.”

You can see why the numbers aren’t more precise. At this point the house hasn’t been found so you don’t know what price you will be paying. You haven’t shopped for property insurance yet. Plus you aren’t sure which city you will be living in, and property taxes vary from place to place.

For now you’ll have to rely on rough numbers. You complete your loan application and you look at houses, and as you go along, various attempts are made at estimating how much money you will need.

Your agent estimates for you, then after you’ve completed your loan application, your mortgage broker sends you another.

When your loan package is submitted to the lender, they send you one. These may be similar, but they may not, depending on what information is available and is included each time.

You will find it a help to understand that closing costs include one-time fees as well as on-going expenses.

One-time costs are called non-recurring closing costs, whereas recurring closings costs are expenses that you will continue to pay as part of owning your house. Some of these will be collected in escrow.

Title insurance, escrow fees, transfer taxes, and recording costs are examples of one-time, non-recurring costs. But property taxes are an on-going expense.

The seller pays the taxes while the house is his – you pay when it is yours. As part of your closing costs, you may receive a credit from the seller for taxes and/or you may have to pre-pay some.
How much this will amount to will depend on your lender’s requirements and on what time of year the escrow closes.

Interest on the money you are borrowing is another on-going expense. You will pay some interest as part of your closing and continue to pay it in your monthly loan payments. If the house becomes yours on September 5, for example, you’ll pay interest from September 5 to September 30 – almost a full month’s interest in escrow. But if the house becomes yours on September 25, your closing costs will be lower. In either case, your first loan payment won’t be due until November 1, because interest, unlike rent, is always paid in arrears.

Here’s another wrinkle. It is frequently the case that buyers do not have enough cash to cover both down payment and all of their closing costs. Most lenders will allow the seller to credit you money to help you – but only if you use it to pay non-recurring closing costs.

You might agree to pay the seller $200,000 for his house with the provision that he give you back, say, $4,000. You will receive this money in escrow. In other words, you will need $4,000 less in cash to buy your house than would be true otherwise. You will pay for this extra cash each month as part of your loan payment.

So you find your house, you make an offer, and it is accepted. You pay for inspections and possibly for a termite report. Several things come up during inspections, things you would like to repair or upgrade. How much will these cost? You’ll also need to set money aside for moving costs – new phone connections, maybe curtains and rugs, possibly a refrigerator or washer and dryer, and professional movers.

By now you and your agent have revised your anticipated costs a number of times. It is always wise to allow something extra for unanticipated expenses – there’s always something.

Not until you have been “locked in” to a specific loan (or loans) will more accurate estimates be possible.

Even then you may be surprised at how lenders’ fees are broken down. You may find on your closing papers fees you’ve never heard of – “tax service,” “documentation fee,” “courier fee,” “transaction fee,” etc., but the total of these should not differ much from what you expected.

Your agent, loan broker, and the title company escrow officer will go over every dollar item with you. Every cost and expense will be delineated – lender charges, any credits due to you from the seller, title company fees, including recording, notary, title insurance and escrow fees, the cost of property insurance for the first year, the money you are borrowing and your down payment – with a grand total at the bottom.

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