It might come as no surprise but there is more to expect financially from purchasing a home than just the down payment. For many it is difficult to anticipate these costs when there really isn't much discussion around them, so much marketing in Real Estate focuses on minimum down payment to make home ownership look as cheap as possible. I prefer my clients to be as prepared as possible instead.
For many, the first time they hear about things like property tax adjustments is at the lawyers office after they have committed to their purchase. You will want to budget for more than your down payment but knowing what to budget for can be a challenge when you don't know what to expect.
To help you through some of the costs that may arise during your purchase I have put together a handy guide.
The minimum down payment for an owner occupied home is 5% on the first 500k and 10% on any amount above that up to $999,999. This means for a 600k property, the minimum down payment is 35,000 (25k for the first 500k then 10k for the 100k above that). This applies for property you will be occupying as your home, however, this does not mean that all properties fit into this category. For example, a rural property with 160 acres will likely require 20% down payment. A fix 'er upper former grow op with no flooring is likely going to need 20% down payment. You may also require more down payment for a variety of reasons like credit challenges, income qualification, longer amortizations etc.
For properties over 1 million you will require more down payment, typically 20% on the first 1.5 million however, some lenders may require even more down payment depending on location and property type.
Rental and investment properties require 20% down payment minimum, but again might require more depending on lender and location factors. For example, some lenders might want more down payment if you are buying a rental property in another province.
Down payment requirements vary greatly and it would be a wise idea to discuss with your broker the type of property you want to purchase and your available funds to see if your expectations are aligned with what you have available to spend.
Taxes are due on every property, but how you choose to pay them can vary and that can bring an unanticipated cost at closing depending on the time of year and how the sellers have managed their tax payments. The property tax season is Jan 1 to Dec 31, however, in many cities and jurisdictions the tax statements are not sent out until June. So the statement received in June 2023 is for the 2023 calendar year. On closing, the lawyer will pro-rate the taxes to account for the sellers portion and your portion as the buyer. This means that if you are purchasing with a closing date of June 1, the seller is responsible for the taxes from January 1 - May 31 and you will be responsible for June 1 - Dec 31. There are different ways that taxes can be paid, taxes can be paid monthly directly to the city, they can be paid annually, or they can be collected through a mortgage lender and paid annually that way. As a result, you have no way of knowing in advance which way the sellers were paying their taxes. If for example, if the sellers were having their taxes collected with their mortgage payment and you are taking possession on June 1 - then the sellers will give you a credit on closing to account for their portion of the property tax bill for that year from Jan to May 31. That will be deducted from the money you need to bring into the lawyers office to close as it will be a credit to you - but don't go spending these funds on new furniture right away - you will in turn be responsible for the entire years tax bill when the bill comes out later in the month. The credit to you should be put away to be applied to the taxes when the bill comes out. However, if the sellers were paying monthly to the city directly, then they should be paid up to date and you would be responsible taking over from there.
On the reverse side, if you are taking possession on August 1 and the sellers have already paid the entire years taxes in full (either on their own or through their mortgage lender) when the statement came out in June - you will be required to make a property tax adjustment on closing and bring in the additional funds to reimburse the sellers from Aug 1 to Dec 31 portion of the taxes that they already paid. This may be additional funds that you were not budgeting for in your closing costs and a good reason you should have additional funds available for your purchase.
In some instances the lender will require the property be appraised to ensure the price is aligned with the value of the property in comparison to other properties that have recently sold. If this is the case, the cost of an appraisal is your responsibility and can range anywhere from $300 - $1500 depending on the property, location and use of the property.
It is always a good idea to have the property inspected by a qualified home inspector to ensure there are no hidden issues or concerns with the property that could be very costly in the future. Things like missing insulation can cost you on heating the home, damaged wiring or water damage from a cracked foundation can be very costly to repair. You should always budget for a home inspection on any purchase. Inspections can range from $400 to $1000 again depending on the type of property, size, location and if you are adding any other inspections like a log inspection for log homes, septic and well inspections for rural etc.
The cost of the lawyer's time themselves is actually quite minimal, however, all of the extras (known as disbursements) that come along with purchasing a property can add up pretty quick. These include things like the lender's legal fees, discharge fees, registration on title fees, lender title insurance policies, buyer title insurance etc. The higher priced the property, the higher the costs will be associated with buying it. You will want to budget in the $1500-$2500 range for legal fees and disbursements associated with a purchase. If you live in a province which also has Land Transfer Taxes or Property Transfer Taxes like BC and Ontario do, you'll also need to educate yourself and budget accordingly for extra costs that can be quite substantial added to your closing costs with the lawyer.
There are 4 types of insurance you may hear about in the purchase transaction.
Default insurance - this is mandatory for clients with less than 20% down payment and is included in your borrowed loan amount and not an extra cost to come up with up front. This insurance protects the lender in case you default on your mortgage.
Home Owners Insurance - this mandatory for all purchases, this is fire and flood insurance to protect you and the lender in the event the property is struck by catastrophe. The cost to this can be done monthly or annually and you will want to call for quotes from home and auto insurance companies, we typically encourage clients to have these quotes done before you waive your conditions and go firm on the property to ensure the insurance is affordable on the property for you before committing. This is especially true if the property has any unique characteristics like a log home, wood burning fireplace, century home with original wiring etc.
Title Insurance - this is a fraud protection product that can be purchased with your lawyer at the time closing, there are 2 policies - one to protect you and one to protect the lender. The lender will often require this to be obtained to protect them and will be included in your legal fees, but if you would like a policy to protect yourself you will want to ask your lawyer for it. Title insurance is a minimal cost and can save you a ton of money and headache if something were to go wrong, it protects you the entire time you own the property for a small one time fee around $200 when you purchase the property.
Life and Disability mortgage insurance - protecting yourself and your loved ones in the event something happens to you should be paramount when making a large purchase and taking on a large debt like a mortgage. This product is not mandatory, but should be budgeted for in your monthly costs so that you can include it comfortably in your plans. Costs for insurance will vary depending on your age, health and the loan amount and can be discussed with your broker in advance to get a ballpark to budget for. You can also call life insurance advisors to get quotes on term and disability policies that are not tied to the mortgage.
Other unexpected costs
Moving costs - It can cost anywhere from a few hundred to a few thousand for movers depending on how much stuff you have and how far you are moving. Your friends and family will appreciate you a lot more if you welcome them for pizza and unboxing stuff as opposed to asking them to borrow trucks and move heavy furniture. After more than 25 moves in my lifetime, I will say that hiring movers is key to maintaining your relationships with spouse, family and friends.
Landscaping costs - if you are purchasing from a builder you will want to see what is included for landscaping. You might be left with an empty slate - perfect for those with a green thumb, but you will want to budget for bringing in trees, sod, gravel etc. You may also need to build a fence between neighboring properties. The same goes for pre-owned homes, you may find you need to redo some landscaping or rebuild a fence. keeping some money aside for landscaping costs is always a smart move.
Blinds and window treatments - let's face it, it's pretty embarrassing to be the person with the new house that has bed sheets hanging in the windows for 2 years because you can't afford curtains or blinds. Blinds can be pricey, a 3 bedroom single family home may be looking in the 5-10k range for a full custom blinds package. Curtains can be more affordable but it is something you will want to budget for if the property isn't coming with any or the sellers are taking their curtains with them.
Appliance replacement - I've had a few clients now who had a hot water tank or furnace die in the first 6 months after moving into their home. Making sure you have excess money in savings for unexpected appliance replacements is going to save you a lot of stress if and when the time comes. Appliances don't last forever, and a budget should be set accordingly.
HOA's - the property might be a part of a Home Owners Association which will carry an annual or monthly fee, usually not a huge amount but worth remembering if you need to include in the budget for the property
Garbage, sewer and water, and other utilities - Depending on the city, town or county your property is located in, there may be extra costs associated with garbage removal services, water and sewer services etc. If the property is on a cistern you will have water costs for filling the tank, cities typically charge for garbage and recycling pick up etc. These might be utility costs you didn't account for, as most people usually think about gas and electric when thinking about utilities. You may also want to inquire on which internet providers are available in the area so you can account for those costs as well in your monthly budgeting. Even things like snow removal in a rural area may come with extra costs to be considered.
Paint and renovations - Again, know what you are getting into. If the property requires renovations, get quotes and get an idea of what that looks like to your savings. There are mortgages where we can include some of this work in the loan amount, with some stipulations, but worth asking your broker about if you are looking to make updates to a property right after you take possession. Otherwise, worth noting the time frame you'd like to make the changes within and if you have the funds saved to do that or not.
The bottom line
Getting into home ownership is more than just the down payment, you want to ensure you have saved a sufficient amount to account for any extras that may arise during the purchase. Inevitably you will want some new furniture or you will need to buy a ladder or a lawn mower and ensuring that you have a budget set aside for all those incidentals is a smart play when planning for your home purchase.
It is a good idea to have at least a few thousand extra above your down payment - typically 1.5% times the purchase price as extra savings is a good measure to start with.
A good Realtor and Mortgage Broker can talk you through the costs associated with home ownership on any property you are considering and help you find a property within your overall monthly budget. A budget for home ownership should not just include the mortgage payment - it should include the entire cost of living in that property to determine if this is the right price point and property for you. As always, feel free to give me a call to discuss this, or any, mortgage related questions at 780-720-4034