– Don’t neglect to budget for property taxes and homeowner’s insurance
September 26th, 2016

Dan Rafter | Sep 26, 2016 |

Buying a home is expensive. When you close your loan, you’ll pay for home inspections, credit reports, title insurance and more. And what are the biggest costs that buyers can incur at closing? Depending on where they purchase their home, both property taxes and homeowners insurance can add significantly to the closing costs for which buyers are responsible. Therefore, it is important for buyers to budget for these costs.

How much you’ll have to bring to the closing table to cover your property-tax and insurance obligations will vary. Tal Frank, president of Columbus, Ohio-based PhysicianLoans, said that most buyers will have to provide two to five months of tax payments to fund their escrow accounts at closing.

But Frank says that this is only the most basic of answers. Some counties might require that homebuyers deposit an entire year’s worth of property taxes into their escrow accounts at closing. Lenders will also require that buyers deposit an extra two months of property tax payments in their escrow accounts. This is a cushion that lenders require to make sure that buyers always have enough money in their escrow accounts to cover their tax bills, even if these bills are higher than what lenders estimate they’ll be.

Frank points to Michigan. In Michigan, buyers pay their taxes ahead when they buy a home. Their lenders might require them to deposit from eight to 10 months of tax payments in their accounts at closing. These lenders will also require two additional months of tax payments for the escrow cushion. This means that some buyers in Michigan might have to come up with a full 12 months of tax payments on closing day. That can be a lot of money if a buyer’s property tax bill is $4,000, $6,000 or more each year.

Frank, though, says that there is no way around this financial hit.

“We always tell people when we are preparing them to buy a home that they have to budget for three things: the down payment, closing costs and escrow costs,” Frank said. “They can then save up to cover those costs or they can seek some financial assistance from family members in the form of gifts that they don’t have to pay back. The earlier they start preparing for this in the process, the better.”