Five Financial Obligations Every Homeowner Should Know

Buying a home can be both stressful and exciting. Homeownership is an important life event, especially for first-time homebuyers. Understanding these five financial obligations can help your journey be less stressful.

1. Don’t be fooled by your mortgage pre-approval amount

Getting a pre-approval is the first step on the journey of owning a home. A pre-approval letter from a mortgage lender does not mean you have it in the bank so to speak. A mortgage pre-approval is only just assurance from a lender that the buyer is in good financial standing to take on a mortgage of a certain size.  Just because you are pre-approved for a certain amount, doesn't mean you can afford it. Your pre-approval does not equal your actual budget. For example, even though you are approved for $300,000 doesn't mean you can pay the payments for a $300,000 mortgage.

2. Closing costs can add up—and be complicated

Closing costs are out-of-pocket expenses which include title insurance, notary fees, and the cost of the deed. Buyers can ask for sellers to pay closing costs but it is not to their advantage in the current seller's market.

“Some loan programs only allow a certain percentage of the sale price to be given to the buyer as a credit,” says Joe DiRosa, a real estate agent with RealtyTopia in Pennsylvania.

That means that if you’re offering $200,000 for a house and your lender only allows you to accept 2% in closing costs, you shouldn’t ask for $5,000—that would be $1,000 down the drain since you can only accept up to $4,000 in credit. Before you make an offer, ask your lender if your loan institutes a limit on closing cost credits.

3. PMI isn’t actually the devil

PMI stands for private mortgage insurance and has been characterized as both a blessing and a curse. PMI is a safety net for mortgage lenders when homebuyers do not put 20% down. It covers the lenders if the homebuyers default on their mortgage. The PMI is an additional payment on your mortgage payment. Unlike your principal, PMI does not add to your equity. Once a homeowner does have 20% equity, you can ask to have the PMI removed.

4. You might have to make escrow payments

Escrow simply refers to the separate account where that money is held; basically, our lender sets aside the money for taxes and insurance, which acts as a safety net to ensure that we sock away enough money for those expenses.  So when you have a loan with PMI, you have to pay money into an escrow for property taxes and home insurance.

5. You need to budget for surprises (and your own mistakes)

There will definitely be unexpected expenses in homeownership. Even if you depend on your clean report from the home inspector, something could come up the next day. A home inspector gives the dishwasher an A+ but the next week after you move in and go to wash the dishes it won't start.

Homeownership is a great investment, but you have to plan ahead. A local Realtor can help you navigate and find your perfect dream home.

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