Unfortunately, I've experienced the same scenario one too many times and the end result has always been the same......an excited home buyer goes crazy over USDA Rural Development's 100% financing loan or HUD's $100 down payment program and mistakenly think that this means that purchasing a new home can be done with NO FINANCIAL INVOLVEMENT OR COMMITMENT on the part of the purchaser whatsoever!!! This couldn't be farther from the truth!!
As frustrating as this problem may be, it still falls back into the realms of an improper Buyer Consultation...As Realtors, present company included, we MUST ensure that our clients fully understand the financial commitment involved in purchasing a home...PERIOD!!!
Here's a list of bulleted points to remember when purchasing a home....
- More likely than not, you will need at least 3.5% for a down payment. FHA requires 3.5% down payment from buyer clients. I know, I know, I know....FHA only requires $100 with a HUD home and USDA Rural Development is 100% financing. Keep in mind, you're not the only person who realizes the excellent opportunity in purchasing a HUD home...finding the right property for you AND actually winning the bid has become a huge obstacle for home buyers. The USDA Rural Development Program only applies to homes within their eligibility areas.....which most likely means "out in the boonies". Having at least 3.5% down payment increases your options and make the homefinding process much easier.
- You will still need EARNEST MONEY!!!! Your earnest money deposit, in a nutshell, shows the Seller that you are earnestly interested in purchasing their home. Theoretically, when a home is placed under contract, the Seller will remove the home from the market because they've found a buyer. If the Buyer wakes up on the eve of closing and decides that they no longer want to move, then the Seller has lost marketing time and the potential of having sold their home to someone else. An earnest money deposit makes it less likely that a buyer will walk away from the deal because they've already made a financial investment in the deal. Customarily, an earnest money deposit is about 1% of the purchase price of the home. However, it is negotiable....after all, this is real estate.
- If you wouldn't buy a car without a test drive, then you WILL NEED to hire a home inspector to inspect your home to ensure that you know EXACTLY what you're purchasing....code violations, defects, and all!!! In addition to a bonafide home inspection, you'll also need a termite inspection. A termite inspection is required for FHA financing!! If your dream home was built prior to 1978, then you'd probably want to get a lead based paint inspection as well. Finally, you'd probably want to invest in a mold and radon inspection as well....My point???? Inspect, inspect, inspect. This is an EXCELLENT way to determine the condition of the subject property. Depending on which inspections you choose, you're probably looking at a cost range of $300 - $1000 dollars.
- Your lender will want to ensure that the value of your home supports the amount of money that they're lending you in order to purchase the home. They will order an APPRAISAL that will do just that! Although the appraisal is a lender requirement....YOU WILL HAVE TO PAY FOR IT! Most lenders will require the payment PRIOR TO ordering the appraisal.....this is an example of an "upfront fee".
- If you're financing through an FHA insured loan, then your appraiser will also point out potential problem areas of the home that can be hazardous to the owner, occupants, or even visitors! If these items are noted on the appraisal, then they will either need to be repaired prior to closing or paid for up front at closing and the funds placed in an escrow account. BUYER BEWARE.....most bank owned or short sale properties are being sold "as is".....defects and all. If you're in a competitive area where these types of properties are soliciting multiple offers, then your leverage for requesting that the Seller makes the repairs prior to closing has been greatly diminished! Most likely, you will have to bring the funds for the cost of the repairs to closing to be placed in escrow.
Knowing the costs involved prior to beginning the process is the best way to ensure that you're well prepared to purchase a home....otherwise, it can become a VERY stressful process!