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Here's what first-time buyers need to budget for

By Mike Wheatley | October 12, 2021

High buyer demand coupled with limited housing stock has translated to double-digit home price gains over the last few months. No wonder, a big number of prospective buyers have found themselves locked out of the market – especially first-time buyers – while others have been forced to stretch their budget beyond what they can comfortably afford.

Amid these dynamics, the median price of an existing home hit $356,700 in August, up almost 15% from a year before according to data from the National Association of Realtors.

More inventory has started hitting the market of late, but first-time buyers are still struggling with today’s exploding home prices and the high costs of homeownership. In August, they comprised just 29% of sales, far below the 40% of the market this segment traditionally makes up.

Most buyers are generally in good financial shape, but experts warn that first-time buyers especially need to keep a careful eye on their budget to ensure they can afford to be homeowners. The danger is that financially overextending yourself can lead to regret and financial hardship later on – indeed, almost two-thirds (64%) of millennials aged 25-to-40 admitted at least one regret after buying their current home, according to a poll by Bankrate earlier this year. The top regrets listed were all finance-related, including maintenance, mortgage and other costs being too high. Moreover, 13% said they felt they had overpaid for their home.

First-time buyers are advised that in order to feel more prepared, they should create a budget and consider all of the costs of homeownership.

NAR data shows the typical first-time buyer will make an average 7% down payment on their home purchase. However, it’s possible to pay less with some types of mortgage offerings, even as low as 3%.

After calculating the down payment required, first-time buyers then need to factor in the other expenses. There’s a lot more than just the mortgage repayments to worry about – expenses such as property tax, homeowners insurance (which averages around $1,000 per year but can vary greatly), utility costs, association fees and maintenance costs.

Many people tend to underestimate the latter, but they do so at their peril.

“Something may break once you are in the home or you may want to decorate it or change the finishes within the home,” Jessica Lautz, the NAR’s vice president of demographics and behavioral insights, told CNBC.

Another big danger associated with maintenance costs is that it has become increasingly more common for buyers to waive the home inspection contingency to try and get their offer accepted. According to the NAR, 23% of buyers waived inspections in August. Doing so can lead to expensive, unexpected repairs later.

“That is the biggest budget buster to me,” said Jacqueline Cooper, president and CEO of Financial Education Associates in Dorechest, Mass. “These are things we don’t notice and we don’t have the experience to determine if this is an okay thing or not.”

Lastly, buyers need to prepare themselves for closing costs. It costs a fair amount of money to close on a home purchase transaction, with the appraisal, title insurance, credit reports and loan origination fees all needing to be paid. Those costs typically come to around 2% to 5% of the price of the home and must be paid in full at closing.

Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
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