You might pride yourself as a financially savvy individual just because you understand basic spending and saving of cash. Or even the in and outs of tax and basics of investing. However, when it comes to buying your first home, you’ll need to reevaluate all you know. Since you may find yourself out of your depth navigating the world of mortgage, closing costs and escrow.
Note: Don’t buy anything you can’t afford!—some aspects of the process can come as a surprise to first-time buyers.
1. Don’t be fooled by your mortgage pre-approval amount
One of the first steps on the road to homeownership was requesting a mortgage pre-approval letter from a mortgage lender. You might get the surprise of the amount being a higher number than you had considered spending.
However, the pre-approval letter is just assurance from a lender that the buyer is in good financial standing to take on a mortgage of a certain size.
Lenders evaluate your financial history to come up with a pre-approval amount. Don’t confuse that number, though, with your actual budget for buying a house. In other words, just because you’re pre-approved for up to, say, Kes 30,000,000, doesn’t mean a Kes 30,000,000 mortgage will fit in your budget.
2. Closing costs can add up—and be complicated
Closing costs include out-of-pocket expenses like title insurance, notary fees, and the cost of the deed and they can add up quickly. So when you find an offer on a house, you can ask for a credit from the sellers toward your closing costs.
A common practice in which, typically, the seller advances an amount in cash that’s then tacked on to the purchase price. But your realtor might urge you not to ask for too much from the sellers at closing.
Some loan programs only allow a certain percentage of the sale price to give to the buyer as a credit.
That means that if you’re offering kes 2,000,000 for a house and your lender only allows you to accept 2% in closing costs, you shouldn’t ask for kes 500,000—that would be kes 100,000 down the drain since you can only accept up to kes 400,000 in credit. Before you make an offer, ask your lender if your loan institutes a limit on closing cost credits.
See Also: Home Closing Checklist For Sellers
3. PMI isn’t actually the devil
Private mortgage insurance—PMI for short—is at once a blessing and a curse. Lenders typically require it of buyers who are putting down less than 20% on their mortgage. This puts homeownership within reach for more people, but it also means an additional monthly payment that doesn’t add to the new owner’s equity.
For that reason, PMI sometimes gets a bad rap—better to shell out the necessary down payment cash (if you can) than waste your money on insurance, right? But in some cases, it’s in your best interest to put less money down and pay the PMI.
4. You might have to make escrow payments
“Escrow” is a foreign word to many Kenyan buyers.
If you take a loan with PMI, you’ll be required to pay into an escrow account for your property taxes and home insurance.
Escrowsimply refers to the separate account where that money is held; basically, your lender sets aside the money for taxes and insurance, which acts as a safety net to ensure that you sock away enough money for those expenses.
While it’s nice to know you’re saving enough for taxes and insurance by paying into escrow, it’s also frustrating for control freaks, who would rather manage your own money—preferably by putting that cash into a high-yield saving account where it can accrue interest.
You can cancel an escrow payment once you’ve built enough equity in your home to remove the PMI.
Related: What is Escrow in a Mortgage, and is it Needed?
5. You need to budget for surprises (and your own mistakes)
During your home inspection, the inspector might assure you everything is all good. Then, the day after you moved in, you find out not everything is in tip-top shape.
Such incidents should be a reminder that costly surprises (and stupid mistakes) are inevitable when you’re new to homeownership—and even when you’re not.
