The hidden costs of transitioning from renter to homeowner range from potential home repairs to remodeling and they add up quickly!

Q: We are definitely ready to be done renting, as we need more space and a home that can accomodate dogs. We have one dog and and would love to add more. Factoring in rising rents, we’ve come to the conclusion that it would be cheaper for us to buy a home than to rent.

However, one thing holding us back is our lack of savings. We’ve learned that you can get a 0 percent down payment mortgage with new FHA loan programs in Massachusetts, and the loan agent we talked to said we would qualify without any problem.

He even said that our monthly payment would be close to our current rent. However, my question is about all the extra costs that go into homeownership. How much should we have in the bank for all the incidentals?

We have maybe $10,000 in cash available right this instant, and as I just got a raise that should be growing more soon. Is this enough?

A: The short answer is maybe. Homeownership comes with surprises. Things break suddenly and need to be fixed: pipes burst, hot water heaters fail, and we’re sure that manufacturers have built appliances to fail every 5 to 7 years (or sooner).  

That doesn’t take into account how most homeowners feel when they move into a new home: they’re immediately overtaken by an urge to repaint, redecorate, and even remodel.

If you have $10,000 in the bank, you’re doing better than most Americans. A recent study by the Federal Reserve Bank found that 40 percent of Americans don’t even have $400 in cash. BankRate found that two-thirds don’t have $500 in cash set aside for emergencies.

Still, Millennials are finding it hard to buy homes given the amount of education debt they still have and their overall lack of savings. That’s a big reason why so many of them are renting right up until their early 30s. In fact, Zillow recently released a report that noted the number of renter households has increased to 37 percent from 33 percent since 2006. There may be quite a number of factors that go into the increased numbers of renters, but we have seen that education debt and lack of savings is hurting many people trying to buy a home.

Still, you’re in good share. You make enough money to afford a home. You could own a home and your monthly payment would be about the same or less than owning a home. It’s the extras that might cause you a problem, but locking in a mortgage at today’s still low interest rates is a smart move. If you’re careful about what you spend over the first year or two you live in a home, you’ll soon figure out how much extra you need to budget each month in order to cover ongoing maintenance and repair issues that will inevitably crop up.

Being worried is a good thing. When you’re a little bit worried, you tend to be more thoughtful about your decision-making process. Good, because this will be the single biggest purchase you’re ever going to make (until the next home you buy).

When you own a home, you – not the landlord – are responsible for the repairs to the home, the repairs and replacement of appliances and fixtures and the repairs and maintenance to the home itself. All of these items cost money. Replacing your hot water tank could cost $1,000. Replacing the furnace could cost several times that amount.

One way to lower the out-of-pocket-cost risk is to ask the seller to purchase a homeowner warranty for you. It will cover the cost of repairing and replacing any mechanical item covered for the first year after closing. The seller should be happy to pay the cost for a good policy and you would then know your downside risk is somewhat limited for the first year. You will have to pay the cost of the service call, but after that the expenses should be covered.

But you’ll still need to cover other costs that your landlord likely covers now, including utilities, real estate taxes (unless those, and your insurance premium, are built into the mortgage), water, sewer, yard work, etc. If the house you buy is significantly bigger than the apartment you rent, all of those costs will go up, too.

Sam recently represented several buyers that had problems with their homes shortly after buying. In one case, the buyers found asbestos in the attic and had to pay around $2,000 to remove it. And, in another situation, the buyers had to replace their air-conditioning system at a cost of around $7,000. The air-conditioning system used the old refrigerant that will be no longer be manufactured after 2020 and were advised to upgrade to the newer refrigerant meaning that they had to replace the compressor, condenser and evaporator coils all at the same time.

With those kinds of prices, you can see how quickly your $10,000 in savings could evaporate.

Finally, when you buy a home and a lender offers you a zero percent down payment loan, you need to find out what other costs are involved in closing on the home. Ask your mortgage broker or lender to run a sample closing statement to show how much money you might have to bring to closing. Your loan office may have not told you that you might have many thousands of dollars to pay at closing. Some of those fees may be to the lender, others may be to the closing agent or title company, and others may be to your closing attorney. All in all, we wouldn’t be surprised if you have to come up with anywhere between $2,000 and $5,000 to close on the purchase.

Unless that amount is wrapped into your mortgage (where you’ll then be paying interest on it for the life of the loan), your $10,000 in the bank would be reduced to $5,000, which would have to cover the lender’s required “cash reserves” and your moving expenses.

Now, we’re not trying to scare you into renting. Actually, we think it’s a smart move to buy now. Just be aware of what it might cost you so you don’t wind up in a situation where you deplete all of your savings, rack up credit card debt and end up financially worse off by buying the home.

Start by taking a deep dive into where you spend your money each month and then look at ways to save up even more over the next few months while you begin to look for a home. If you set up a budget for yourselves, you might have extra money on a monthly basis to put away towards savings and towards house expenses as they come up. We hope this information helps and if you want more guidance, you can take a look at Ilyce’s newly-updated 100 Questions Every First-Time Home Buyer Should Ask (4th ed), available online and at major bookstores around the country.