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Watch Out for These 5 Last-Minute Home-Buying Costs

Unexpected costs toward the end of the buying process can leave prospective buyers scrambling.

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In 2015, 5,250,000 existing homes and 510,000 newly constructed properties were sold in the U.S. And as Wise Bread predicted in December 2015, homes have been one of the necessities that are cheaper in 2016, boosting the percentage of first-time homebuyers entering the market.

See Also on Kiplinger: How Smart a Home Buyer Are You?

But unexpected costs toward the end of the buying process can leave prospective buyers scrambling at the last minute or, even worse, unable to land the home of their dreams. Let's take a look at five home-buying costs that could appear at the eleventh hour.

1. Lower Property Appraisal

The seller told you the home is worth $350,000 and you earnestly believed that valuation. So, you went to the bank and applied for a mortgage based on the market value of $350,000. To meet compliance requirements and to do its due diligence, the bank includes an appraisal contingency in your mortgage application. This clause requires a third-party appraiser verifies the home is actually worth $350,000.

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If the appraisal requested by your bank were to come under $350,000, then somebody would have to come up with the difference for the bank to approve the loan. Depending on several factors, including the number of days the house has been on the market and the skill level of your real estate agent, the seller, her agent, or your own agent may help you with the difference. In the worst case scenario, you'll have to come up with the difference or have to say goodbye to that home.

In the event that you believe the third-party appraiser may have provided an inaccurate estimate, you could hire another appraiser, submit that new estimate to the bank and let the bank re-evaluate the mortgage. However, you would be most likely responsible for the cost of that second appraisal.

2. Mortgage Insurance

Let's imagine you are in the process of saving for a decent down payment for your first home. Two years before you reach your savings goal, a home is finally available in your dream neighborhood. Your broker is confident a similar home won't be available for another five years, so he suggests you buy. The catch: You can't come up with (at least) 20% of the home value for a down payment.

When you pony up less than a 20% down payment to buy a home, you'll have to pay private mortgage insurance (PMI). The Homeowner's Protection Act requires homebuyers who finance more than 80% of a new home's value to purchase PMI. Keep in mind this is protection for the lender (not you!) in case you default on your mortgage.

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The average PMI payment ranges from 0.5% to 1% of the total value of the home loan. Still, this cost isn't small potatoes. In 2015, the average value of a mortgage in the U.S. was $172,341. Assuming a 1% PMI, the average PMI payment in 2015 was about $1,723. That would be one cost you would have to pay year after year until your loan value reaches 78% of the original market value of the secured property.

Still, your lender may have a strong case to continue requiring the PMI in the event of a dramatic price drop in the market value of your home, an existing home equity line of credit (HELOC) on your property, or a long string of late monthly payments within the last two years.

See Also on Kiplinger: 5 Hidden Costs That Surprise First-Time Home Buyers

3. Dramatic Change in Financial Situation

When you're in the process of buying a home, you should keep a consistent financial picture, especially with your credit score. So, delay buying all those expensive new kitchen appliances, pieces of furniture for your living room, and blue period art pieces on credit until you have the keys in hand. A dramatic change to your credit score is a major red flag for the lender and the financial institution may decide to offer the mortgage at a higher interest rate than originally expected — or turn down the loan entirely.

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Here are other financial do's and don'ts until settlement day:

  • Do keep a good paper trail of the source of your down payment;  
  • Don't make large transfers between your accounts;  
  • Do delay any other large purchases on credit, such as a car;  
  • Don't miss any monthly payments on existing debt (they account for 35% of your credit score!);  
  • Do provide all documentation requested by your lender and agent within the stipulated time frame;  
  • Don't open new credit or store cards.

4. Repairs

When you receive the report from a licensed home inspector, you may find your dream home is not so dreamy after all. Take the comments from the inspector seriously and determine whether it's worthwhile to ask the seller to incur some of those costs, or to provide a financial remedy. After all, you'll be the one covering all of them once the home is yours.

However, choose your fights wisely. No home is 100% perfect. Having to replace all door handles because you find them out of style isn't nearly as bad as having to battle black mold in the basement of your soon-to-be home.

5. Special Case: Hike in Homeowner's Association Fees

Last but not least, make sure to review the minutes of the meetings of the homeowner's association (HOA) for your property for at least the last six months.

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Pay special attention to two items.

First, look for a schedule of upcoming monthly dues. In some cases, you may be welcomed with a higher-than-expected bill right off the bat.

See Also on Kiplinger: 5 Reasons You Hate Your HOA

Second, watch out for any large projects that are under current review by the board of the HOA. For example, installing a complex system of solar panels on the roof or replacing all the windows of the apartment building because existing windows no longer meet city codes could both mean an ever-growing monthly HOA due. In certain circumstances, the HOA board could be planning to present you the option to pay your entire pro rata amount for the project or to finance the cost through the HOA's loan. Either option would put a dent on your monthly budget.

This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website.

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This article is from Wise Bread, not the Kiplinger editorial staff.