Picture this: You’ve found the home of your dreams, you’ve made an offer and it’s been accepted. You’re excited to finally move out of your small apartment and into a nice home with a yard.
But that happiness subsides when you realize there’s a few thousand dollars of closing costs, inspections and escrows to pay out-of-pocket. You don’t have a dime in savings. Not a good place to be, is it?
If you want to be prepared for this major purchase it’s a good idea to start saving while you’re still renting. The VA home loan is a $0 down program, but it doesn’t mean there aren’t costs involved in the homebuying process.
What are the costs that you have to be prepared for before homeownership?
First, let’s talk about some of the costs you should start saving for:
- Closing costs: If you don’t negotiate your contract so the seller pays all these costs, you’ll likely have to bring money to the closing table. Typical closing costs range from 3 to 6 percent of the loan amount.
- Escrows: Lenders establish escrow accounts for real estate taxes and homeowners insurance (also called hazard insurance). If there are Home Owner’s Association dues, those may also be included. These fees can vary greatly depending on the insurance company you select and your geographic area. It’s also common for the title company to collect 15 months of homeowners insurance premium and three months of taxes. If you know what area you want to purchase in, consider calling a few homeowners insurance providers and the county regarding taxes to get estimates in advance. Your VA loan specialist may be able to help with this, too.
- Inspection: A home inspection isn’t required, but it’s highly recommended. Conducting a home inspection allows you to identify major problems with the home and make an educated decision on whether you want to proceed with the purchase. The cost of a home inspection is based on several different factors including the size of the home. You should plan to spend about $400.
- Appraisal: An appraisal establishes a value for the home based on comparable recent sales in your area. The appraisal fee generally ranges from $350 to $500 with a VA loan.
- Earnest Money: When you make an offer on a home you will deposit with an escrow agent a certain amount of earnest money, also known as good faith money. A typical earnest money deposit ranges from $500 – $2,000.
- Down payment: A down payment is not required for VA home loan (learn about exceptions here). If you want to put some money down, include this in your savings plan. Doing so may lower your VA Funding Fee amount if applicable.
- Miscellaneous: If you choose a home using a private well or septic tank you may have to order water tests. Alternatively you may have to get a road maintenance agreement drafted by an attorney. Miscellaneous fees will be based on the specific property. Be sure to talk with your VA loan specialist about any unique characteristics of the home at the time you make an offer. Until then it would be smart to budget $300 – $500 for miscellaneous fees.
So how do you save for these costs when you’re paying rent? There is no magic solution here. It will take hard work, dedication and time.
3 Tips to Help Boost Your Budget
1. Know where your money is going each month.
Whether you have a budget or just pay bills as they come due, it’s really important to know where your money is going each month. This helps you to better identify areas where you can make cuts. Consider writing down every transaction over the course of a month and highlight areas where you can cut spending. Then create a budget and make an effort to reduce spending in these areas. This will allow you to put the money saved into a specialized home savings account.
2. Automatic Transfers
If you’ve already established how much you’d like to contribute to your home savings each month consider setting up an automatic transfer. Look into setting this up with your payroll department or bank. By having a certain dollar amount or percentage of your paycheck automatically transferred to a home savings account you can ensure that you don’t get sidetracked by “wants” before you get around to saving.
3. Additional Income
Consider taking on a temporary part-time, seasonal or side job to supplement your current income. Alternatively, consider harnessing your talents to offer a service or goods that you can sell online or locally. Any way you can find to supplement your income on a short term basis can help you save. Just make sure that you use your willpower and save that hard earned money instead of spending it.
By planning and saving now, you can avoid stress and make your eventual homebuying process a smooth one.
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