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How to Budget for Closing Costs and Fees on a Mortgage

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When you buy a home, in addition to your down payment, you need to budget for closing costs. Closing costs are the fees paid to third parties that help facilitate the sale of a home. The amount you’ll pay depends on several factors including the price of your home, your lender’s requirements, and the location of the property. We’ve put together this guide to help you get a sense of what to expect.

What costs to expect when closing on a mortgage

The type and amount of fees you’ll pay vary widely based on the lender you work with, the loan you choose, and your location. Here are some common fees to expect when closing on a home loan:

Fee

Description

Appraisal fee

Paid to a professional who gives the lender an estimate of the home's market value.

Attorney fees

In some states, an attorney may be required to represent the interest of the buyer and/or lender. This fee is paid to the attorney to prepare and review all closing documents.

Credit report

Some lenders charge a fee for accessing your credit information.

Flood determination

Paid to a third party to determine whether the property is located in a flood zone. If your property is in a flood zone, your lender may require you to purchase flood insurance in addition to homeowners insurance.

Home warranty fees

If you choose to purchase a home warranty on the property, the annual premium may be included in your closing costs.

Homeowners association (HOA) fees

If your home is located within a homeowners association, the association may charge a fee to help pay for services and capital improvements. You may also need to prepay a portion of your annual dues at closing.

Homeowners insurance

The first year's premium for your homeowner's insurance is typically paid in full at closing.

Inspection fees

Paid to a home inspector to evaluate the home and tell you whether the property you want to buy is in good condition. You may also have a separate pest inspection to check for termites and other pest infestations.

Land survey

Your lender may require that a surveyor conduct a property survey.

Origination charges

Upfront charges from your lender for making the loan. This may include an application fee and underwriting fees.

Notary fees

The cost of having a licensed notary public certify that the persons named in the documents did, in fact, sign them.

Points

An upfront fee paid to the lender in exchange for a lower interest rate.

Prepaid interest

If you close on your loan in the middle of the month, your lender will collect interest on your loan from the closing date until the end of the month.

Private mortgage insurance premium

Depending on the type of loan you choose and how much money you put down, you may have to pay mortgage insurance – a policy that protects the lender against losses from loan defaults. Some lenders require an upfront premium, some collect it in monthly installments, and some do both.

Property taxes

Six months of property taxes are typically paid at closing.

Recording fees

State and local governments typically charge a fee to record your deed and other mortgage documents.

Real estate broker or agent fee

Fees paid to seller's real estate broker for listing the property and to the buyer's broker for bringing the buyer to the sale. The seller of the property typically pays these fees.

Title insurance

Provides protection if someone later sues and says they have a claim against your home, either from a previous owner's delinquent property taxes or contractors were not paid for work done on the home before you purchased it.

Title search

A fee paid to the title company to search the public records of the property you are purchasing.

Transfer taxes

Taxes imposed by the state, county, or municipality on the transfer of property. They may also be called conveyance taxes, stamp taxes, or property transfer taxes.

The amount you’ll pay depends largely on your location. A 2017 survey from ClosingCorp, a provider of residential real estate closing cost data, found that the national average closing costs totaled $4,876. That figure is based on closing cost data reported to more than 20,000 real estate service providers across the country. ClosingCorp compiled the average closing costs in each state, and based on the average purchase price in each state, average closing costs ranged from about 1% to about 4% of the purchase price. (The actual closing costs you pay could be higher or lower — a general rule of thumb says to expect paying about 2 to 7% of your home’s purchase price in closing costs.)

States with the highest average closing costs were:

  • District of Columbia: $12,573 (2.01% of average purchase price)
  • New York: $9,341 (2.60%)
  • Delaware: $8,663 (3.36%)
  • Maryland: $7,211 (2.28%)

But based on percentage of average purchase price, these states had the highest average closing costs:

  • Pennsylvania: $6,633 (3.50%)
  • Delaware: $8,663 (3.36%)
  • Vermont: $6,839 (2.99%)
  • New York: $9,341 (2.60%)

States with the lowest average closing costs were:

  • Missouri: $2,905 (1.63%)
  • Indiana: $2,934 (1.89%)
  • South Dakota: $2,996 (1.48%)
  • Iowa: $3,138 (1.70%)

And by percentage:

  • Hawaii: $5,528 (0.84%)
  • Colorado: $3,994 (1.09%)
  • Massachusetts $4,273 (1.14%)
  • California: $6,288 (1.20%)

In areas where home prices are high, closing costs will typically be high as well because many closing costs are calculated as a percentage of the home’s purchase price. In other areas, the ClosingCorp report pointed to high county transfer taxes as the principal reason certain areas have such closing costs.

Fortunately, there are steps to you can take to save on closing costs.

How to save on closing costs

Step 1: Choose your location

The location has a lot to do with the total closing costs you’ll pay. Factors that affect closing costs include:

  • Home price. Since many costs are calculated as a percentage of the home’s purchase price, buying a less expensive home can lower your closing costs.
  • Property taxes. You may have to prepay six months of property (or real estate) taxes at closing, so buying a home in a state with high-property tax rates can significantly impact your closing costs. The Tax Foundation publishes a list of the property tax rates by state. New Jersey is the highest with an effective tax rate of 2.11%, and Hawaii is the lowest at 0.28%.
  • Laws and customs governing the closing process. Some states require an attorney to handle closings, resulting in higher legal fees at closing. In other states, closing costs are lower because closings are handled by a title or escrow company.
  • Real estate transfer taxes. Transfer taxes are imposed by state and local government entities and can vary widely by locale. The National Conference of State Legislatures publishes a list of real estate transfer taxes by state. Some states, such as Alaska and Louisiana, have none as of 2017. In some localities in Colorado, the rates can be as high as 4%.

Ask your lender or real estate agent about closing costs in your area. If you’re not determined to live in a particular area, you could save thousands in closing costs by buying in a neighboring state or county.

Step 2: Shop around

A crucial step to saving on closing costs is to shop around. Home loans are available from many different types of lenders, and different lenders may quote you different rates and fees, even of the same type of loan. You should contact several lenders for quotes.

When you receive a quote, don’t just get the interest rate, APR, or monthly payment amount. The lender should provide you with a Loan Estimate that discloses the loan terms, amounts, interest rate, total monthly principal and interest, and whether the item can increase after closing. It also communicates which closing costs you can shop around for and which are fixed no matter which lender you choose.

Also, take a look at the homeowners insurance premium listed on Page 2 of the Loan Estimate. The lender will estimate an amount for the Loan Estimate, but your homeowner’s insurance premium is set by the insurance company, not the lender, and insurance rates can vary drastically by company. Comparison shopping for insurance can have a significant impact on your closing costs, as you’ll typically pay the first year’s premium at closing.

Step 3: Negotiate

Jeffrey Miller, co-founder of AE Home Group in Baltimore, Md., says knowing whether closing costs are negotiable or non-negotiable depends on whether or not they’re being charged for the mortgage company’s labor or to an outside service. “Line items like origination fee can be negotiated lower, whereas line items like the county recording fee are set by an outside third party and are non-negotiable,” Miller said.

Page 2 of your Loan Estimate will list the services you cannot shop for and the services you can shop for. The services you cannot shop for may be set by a government program or a third party rather than the lender. Your lender may provide you with a list of approved vendors for the services you can shop for.

Miller says in his experience, the line item with the most potential savings is the survey. “As a buyer, you have the right to select the survey company that is used,” Miller said. “We’ve seen this price range anywhere from $120 to $600. If this amount is on the high side, then it may be advisable to select a new survey company.”

Step 4: Ask the seller to pay closing costs

Many loans, including FHA loans, allow sellers to contribute a percentage of the sales price to the buyer as a closing costs credit. This is especially useful for buyers who are short on cash for the down payment and closing costs but can handle a slightly higher loan balance.

For instance, say the seller is asking $200,000 for the home. The buyer can offer $204,000 but asks the seller to cover up to two percent of the original asking price in closing costs ($200,000 x 2% = $4,000). The seller is able to get the same net profit on the sale, and the buyer reduces his closing costs by $4,000.

Keep in mind that lenders may have restrictions on how much the seller can credit to the buyer at closing. For instance, FHA loans limit the seller concession to 6% of the home’s sales price. There may also be restrictions on the types of closing costs that can be covered by the seller credit. For instance, they may restrict the seller credit to covering non-recurring items like the title insurance and loan origination fees.

Step 5: Time your closing

Part of your closing costs consists of prepaid interest charges for the time between your closing date and the end of the month. The earlier in the month you close, the more you’ll pay in prepaid interest. To reduce the amount you’ll need out of pocket, you can consider closing at the end of the month. The difference may be small, but if you’re really strapped for cash to close, this could help. However, timing your closing at the end of the month doesn’t actually save you any money in the long term. It just impacts the amount you’ll need to come up with at closing.

Step 6: Sign in person

Kevin Miller, Director of Growth with Open Listings, an online house-hunting service based in Los Angeles, says you may be able to reduce the costs you’ll pay at closing simply by asking your escrow company. “You should contact them at the beginning of the process to discuss the fees they charge you,” he said. “If you agree to use electronic documents and sign in-person, you may be able to avoid fees for a mobile notary, printing, and mailing.”

Should I get a no-closing cost mortgage?

While shopping around for a mortgage, you may have come across a “no-closing cost mortgage” and wondered if it’s the right deal for you.

A no-closing-cost mortgage is worth looking into, but “no closing costs” doesn’t actually mean you won’t have to come up with any cash for closing. Instead, it means that the lender doesn’t charge any lender fees. However, they may charge a higher interest rate to cover the costs of making the loan or add the closing costs to your loan amount.

Either way, you won’t need to come up with as much cash to close, but you’ll typically have a higher monthly payment.

Also, keep in mind that you may still have to pay costs at closing, such as title insurance and appraisal fees. Before you get locked into a no-closing-cost mortgage, ask the lender for a Loan Estimate and take a look at the interest rate, APR, monthly payment and the amount you’ll need at closing. Consider whether reducing the cash you need to close is worth paying more in the long run with a higher interest rate or larger loan amount.

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The bottom line

When you’re in the market for a mortgage, it pays to shop around. Review your paperwork carefully. Ask your lender about any costs and fees you aren’t familiar with, or anything that changes from your Loan Estimate to the closing documents. Negotiating can be intimidating for many people, but your home is a big investment. The more you can save on closing costs, the more cash you’ll keep in your pocket for moving, buying furniture, and making your new place feel like home.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Janet Berry-Johnson
Janet Berry-Johnson |

Janet Berry-Johnson is a writer at MagnifyMoney. You can email Janet here

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How to Rebuild Equity on an Underwater Mortgage

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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There are some things you can’t control as a homeowner, such as natural disasters, neighbors or the direction of home values. If these happen to take a nosedive, you could watch the equity you’ve built in your home disappear.

In fact, more than 5 million homeowners are “seriously underwater” on their mortgages — meaning the amount of debt attached to their home is at least 25% higher than the home’s value, according to the latest data from ATTOM Data Solutions, a property research firm. If you’re one of these homeowners, don’t despair. There are ways to rebuild the equity on an underwater mortgage. In this guide, we’ll explain what it means to have a mortgage underwater and how to rebuild the equity you’ve lost.

What is an underwater mortgage?

An underwater mortgage is a loan with an outstanding balance that exceeds the value of the home it secures. This is also referred to as having negative equity or being upside down on your mortgage.
There are a few ways that a mortgage can become underwater:

  • Significant drop in home values
  • Multiple loans taken out against a home, and the total balance is higher than the home’s value
  • Monthly payments not covering the interest due on a mortgage (negative amortization), and the balance owed grows instead of shrinks

If you tried to sell your home while it’s underwater, the sales proceeds likely wouldn’t be enough to pay off your mortgage, which would leave you on the hook for the remaining balance. You’d also have a hard time refinancing your mortgage, since you need to have some equity available for a refinance in many cases.

How to tell when my mortgage is underwater

If your current mortgage balance is higher than your home’s current market value, then your mortgage is underwater.

For example, let’s say your home was worth $250,000 when you first bought it, and you took out a $200,000 mortgage with a 4% interest rate. Five years later, the economy takes an unfortunate tumble and home values drop by an average 40%, giving your home an approximate $150,000 value.

Based on your loan’s amortization schedule, the outstanding balance you’d owe in year five would be about $180,000. That leaves you with $30,000 in negative equity.

Negative Equity in Your Home

Estimated Home Value in Year 5

$150,000

Estimated Mortgage Balance in Year 5

$180,000

Available Equity

-$30,000

If you find yourself in a situation similar to the one described above, there are options available to help you rebuild your home equity, which we’ll discuss in the next section.

How do I rebuild equity?

Just because your mortgage is underwater doesn’t mean it has to stay that way. There are ways to start rebuilding the equity you might need to fund other financial goals.

Pay down your mortgage as usual

The most straightforward option is to continue to pay down your mortgage as you normally would. Perhaps the housing market will recover, leading to an eventual rise in home prices. Either way, as long as you’re submitting your mortgage payments in full and on time, you’ll pay it off on schedule.

You can help speed things along by paying extra toward your principal balance. There are several ways to tackle this, which might include adding a couple hundred dollars — or whatever amount is comfortable for you — to your mortgage payment each month.

Another option is to make biweekly payments instead of monthly payments. This can add up to one extra payment each year. That’s because there are 52 weeks in a year and you’d make 26 half payments, which equals 13 full payments.

Be sure to ask your mortgage lender or servicer to direct any extra money you pay on your loan toward your principal balance (not interest).

Modify your mortgage

If you’re experiencing a temporary hardship on top of your underwater mortgage and are struggling to keep up with your mortgage payments, you could benefit from a mortgage modification.

A modification is when your lender changes the original terms of your mortgage to make it more affordable for you. Changes might include:

  • Extending the number of years you have left to repay your mortgage
  • Lowering your mortgage interest rate
  • Reducing your outstanding principal balance
  • Switching your mortgage rate type from adjustable to fixed

Eligibility requirements vary, so it’s best to contact your lender for more information about how to modify your loan.

Recast your mortgage

Another way your lender can make tweaks to your existing mortgage is by recasting your mortgage — especially if you’ve recently come into a financial windfall.

A mortgage recast involves paying a lump sum of money toward your outstanding principal balance. Your lender then recalculates your monthly mortgage payments based on the lower principal balance, but your mortgage rate and term length stay the same.

You’ll need to pay at least $5,000 — sometimes more — to recast your mortgage, and you might also be charged a recasting fee, up to $500. Check with your lender for more details and requirements.
Conventional loans typically qualify for mortgage recasting, but not government-backed loans, such as those insured by the Federal Housing Administration (FHA loans) or Department of Veterans Affairs (VA loans).

Refinance your mortgage

Although the Home Affordable Refinance Program (HARP) — a government-sponsored initiative that helped nearly 3.5 million homeowners refinance their mortgages — has expired, there are other programs available that provide similar assistance.

Fannie Mae and Freddie Mac, the two major agencies that buy and sell mortgages to and from lenders that follow their guidelines, created new initiatives as HARP was ending to address those homeowners who were underwater on their conventional mortgages or have high loan-to-value (LTV) ratios. An LTV ratio is calculated by dividing your loan amount by your home’s value. Revisiting the underwater mortgage example above of a home worth $150,000 with a $180,000 mortgage balance, the LTV ratio is 120%.

Fannie Mae’s high LTV refinance option offers homeowners with an LTV ratio above 97% the opportunity to refinance their mortgage. Homeowners must be current on their mortgage payments and benefit from at least one of these options:

  • A reduction in the principal and interest portion of their monthly payment
  • A lower interest rate
  • A shorter loan term
  • A more stable mortgage, such as a switch from an adjustable-rate to a fixed-rate loan

There is no maximum LTV ratio for fixed-rate mortgages, but adjustable-rate mortgages (ARMs) have a 105% LTV maximum. The existing mortgage must be Fannie Mae-owned.

The Enhanced Relief Refinance mortgage offered by Freddie Mac also requires homeowners to be current on their mortgage payments and have an LTV ratio that is higher than allowed for a standard refinance. The maximum LTV ratio allowed for ARMs is 105%; there’s no maximum for fixed-rate loans.

Homeowners must benefit from a shorter loan term, lower principal and interest payment, lower mortgage rate and/or a move from an ARM to a fixed-rate mortgage.

If you have a government-insured mortgage — FHA, USDA or VA loan — you may be able to take advantage of a streamlined refinance, which typically has a limited credit documentation and underwriting process. Additionally, you may not need an appraisal to verify your home’s value.

  • FHA: FHA borrowers applying for a streamlined refinance must be current on their mortgage payments and benefit from at least a 5% reduction in their monthly payment amount. You may also qualify if you’re switching from an ARM to a fixed-rate mortgage or shortening your loan term.
  • USDA: Borrowers with USDA loans may qualify for the streamlined assist refinance option if they have little to no equity and are current on their payments. The benefit must come from a monthly mortgage payment that’s at least $50 lower than the existing amount.
  • VA IRRRL: The VA Interest Rate Reduction Refinance Loan program helps homeowners with VA loans by lowering their mortgage payment through a reduced interest rate. Guidelines require a minimum 0.5% rate reduction.

Other options for underwater homeowners

If you’re ready to walk away from your home or simply can’t afford it anymore, consider one of the avenues below:

Home sale

You could attempt to sell your home, with the understanding that you likely won’t make enough profit to pay off your mortgage. If you have a hefty savings account, you can use some of those funds to pay the difference between the amount your home sale covers and your outstanding loan balance.

Short sale

Another option is a short sale, which allows you to sell your home for a price that is less than the outstanding balance on your mortgage. Additionally, your mortgage lender may forgive your remaining mortgage debt. Keep in mind that your credit score will take a hit with this option — it could drop by 100 points, according to FICO.

Deed in lieu of foreclosure

A deed in lieu of foreclosure, also known as a mortgage release, is the process of voluntarily transferring the ownership of your home to your lender. In exchange, you may be released from your mortgage payments and debt. This option also prevents you from going into foreclosure.

Similar to short sales, a deed in lieu of foreclosure negatively impacts credit scores.

The bottom line

You may feel helpless if you’re dealing with an underwater mortgage, but you have options. If you’re able to manage your monthly payments as they are, it may be best to continue paying down your loan as usual, making extra payments whenever possible. But if you’re struggling or simply want to reduce your payment amount, consider a loan modification or a refinance.

Be sure to discuss your available options with your mortgage lender or servicer, and remember that maintaining on-time payments will help your case.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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Life Events, Mortgage

The Risks and Rewards of Out-of-State Investment Properties

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Mortgage

They say real estate is all about “location, location, location.” That’s especially true when it comes to investing in rental properties. Where you choose to buy can have a significant impact on your return on investment.

For example, in a state like New York, where the median mortgage exceeds the median rent by nearly $250, buying a property to rent out doesn’t make much financial sense. If you consider buying rental property in a different state, such as North Carolina where rents in the city of Charlotte top mortgages by $84 per month, you’ll net a profit instead of a loss every month your tenant pays rent.

Before you start the interstate home search process, you should know the risks and rewards of out-of-state investment properties.

Potential rewards of buying an out-of-state investment property

Very often, the primary reason to buy an out-of-state rental property is investment properties where you live are too expensive. There are some other more strategic reasons that we’ll cover next.

Diversify your real estate assets

Real estate markets rise and fall. During the housing boom of 2003 to 2007, many of the “sand” states, such as California, Arizona, Florida and Nevada, experienced home price appreciation at rates well above historic levels.

Investors learned a painful lesson in the danger of not diversifying when the housing markets in those states crashed during the housing crisis. Investors who had investment real estate concentrated only in these states lost big, while those who spread their portfolios out to other states fared better.

Purchase future vacation or retirement residences

If prices and rents are competitive in a state you’ve always wanted to vacation in, you may want to purchase the property first as a rental and allow tenants to build some equity for you while you generate income. After a few years, you may decide you want to spend a few months a year vacationing in the home and rent it out seasonally with a rental plan from a service such as Airbnb or VRBO.

Alternatively, you may live in a cold-weather state, such as Massachusetts, and want to retire to the warm winters of Arizona. You could put the wheels in motion on your retirement plans by buying a rental property there first that has the amenities you would want in a home for retirement.

Once you’ve pocketed some rental income and equity from renters, you can pack up for the cross-country move into the rental, throw out the snow shovel and enjoy wearing shorts instead of parkas during the holiday season.

Buy where the laws suit your rental strategy

Short-term rentals have become very popular for real estate investors, but they face legal challenges in some places. For example, New York City subways are covered with signs warning riders to avoid short-term rentals.

If you are interested in renting out your property through a service like Airbnb, buying in a state that has more flexible laws about short-term tenants is your best bet.

Net more income monthly with lower property taxes

According to a recent LendingTree study, homeowners in San Jose, California, paid on average $9,626 in property taxes each year. In Salt Lake City, homeowners pay only $2,765 per year — which means you’d have to get an additional $567 per month in rent in California just to cover the property tax expense before you could make any profit.

Risks of buying an out-of-state investment property

Like any investment, there are risks associated with buying out-of-state rental properties. We’ll discuss those next.

Long-distance property management problems

If you have a rental in the city you live in, you can deal with an unexpected tenant move-out or a late-night plumbing problem by driving over to the property and taking care of the issue yourself. But you’ll need to make some decisions about how to manage an out-of-state rental.

If you hire a property management company, they’ll take 8% to 12% of your monthly rent as a fee, eating into your monthly rent profit. If you self-manage, you’ll need to make sure you build relationships with local handymen, roofers, plumbers and pest control professionals so you have their numbers handy if a tenant emergency comes up.

State laws that restrict how you rent your property

Short-term rentals, such as Airbnb, may be a great way to generate a higher monthly income than you would get with a 12-month lease, but some cities and neighborhoods aren’t too keen on having a lot of different people coming and going through a nearby house. If the laws prohibit short-term rentals in an area you’re interested in, you’ll have to crunch the numbers to see if market rents for long-term leases provide you with a good return on your rental investment.

What to look for when considering an out-of-state rental property

When you’re buying in another state, take extra precautions to make sure you understand everything about the local housing market, building standards and how the local economy is doing before you start making offers. The last thing you want to do is end up with an out-of-state money pit.

Get a thorough home inspection

No matter how nice the home may look in pictures or at an open house, there can always be problems beyond the smell of new paint and carpet. Building standards and practices may vary from state to state and city to city, and you don’t want to be caught by surprise because you didn’t know polybutylene pipes behind the walls of homes built in Tucson, Arizona, have been known to burst without warning.

A good local home inspector will also help you understand whether a property has been built and maintained according to local building standards and identify any issues, such as an unpermitted room addition, that could cause you trouble with local housing inspectors down the road.

Interview several property management companies

Depending on the town, you may find very high-tech, organized property management shops with decades of experience or small mom-and-pop shops that offer real estate property management services. Either way, you want to know what they do for their fee. The graphic below provides a list of questions you should ask to make sure the property manager is a good fit for your out-of-state rental.

  • How many rental units do you manage? Ideally, you want a manager who has between 200 and 600 rental units. This indicates that the management company has a solid enough client base to understand the local market but not so extensive that they won’t be able to handle managing yours.
  • What experience does your company owner have managing rentals? When the long-distance plumbing hits the fan you don’t want to be dealing with a company that’s never managed rentals. There is no college of rental property management, and you don’t want to have your rental managed by someone who’s still learning the ropes.
  • Are you actively investing in real estate in your market? If you are buying in a housing market you’ve never purchased in, you may want to have a property manager who understands the nuances of the local rental market. This is especially important intel when you’re dealing with an out-of-state investment property in a neighborhood that may be going through changes that only an experienced local investor would know about.
  • How do you collect rent? In order to track cash-flow of a rental property, you should be able to easily track payments. The best method is through an online payment system that gives you real-time information about any late payments. If you took out a mortgage to purchase the rental property, you want to know as early as possible if a tenant is going to miss rent, so you can move money to cover the mortgage payment.
  • What is your average vacancy time on rentals? The correct answer should be two to four weeks. An experienced property management company should have the marketing and rental pricing know-how to make sure your property is not vacant for more than a month. It’s bad enough having a rental vacant, but when it’s out-of-state, you want to know the company managing the property has a track record of getting renters quickly to minimize the expenses you incur when a rental is without a renter.On the other hand, a property manager that rents out your place in less than two weeks may be pricing it too low.
  • How do you handle maintenance and repairs? It’s not uncommon for a property manager to have “preferred” vendors to help with the inevitable issues that come up with maintaining and repairing a rental. You’ll want to get a list of these preferred providers and keep track of their expenses.Also be sure to put a cap on the cost of repairs that can be done without your authorization. You should trust the company to handle a $100 fee, but you may want to cap them on anything more than $200 so you can have a chance to see if you need a second opinion with a different vendor.

Track property tax trends in the neighborhood

Property taxes are a fixed expense you can’t get around paying, so be sure to track the last five years of property taxes to see what the average increase has been. If you’re seeing an acceleration in the tax rate, figure that into your return-on-investment analysis, so you don’t end up in a situation where your monthly expenses are more than the rent you’re taking in.

Make sure you understand the rental market in the area

Rental markets ebb and flow as new homes are built, new employers set up shop nearby or new schools are built in the area. A good property manager or experienced real estate agent should be able to give you a good idea of where the market is headed with a comparable rental analysis.

When you bought your first home, you may have gotten a comparable market analysis (CMA), which analyzes what homes are selling for in the area you’re thinking of buying. A comparable rental analysis looks at rentals nearby to give you an idea of what your monthly income is going to be.

If you finance the property with a mortgage, you’ll likely need a rental analysis form 1007, which is an additional report in a residential home appraisal that provides an opinion of the market rent for the home you’re buying. In some cases, the appraiser’s projected market rent can be used to help you qualify for the new mortgage, even if you don’t have a lease on the property you’re buying.

Special mortgage considerations for out-of-state rental property

If you’ve been buying investment property in your hometown, you already know financing a rental property comes with higher down payments and interest rates. There are a few more factors to consider.

Are transfer taxes due and who pays them?

Depending on what state you are buying property, transfer taxes may be charged for you to take ownership of the property you are buying. Unlike property taxes, these are a set lump sum percentage of your sales price, added to your closing costs.

Transfer taxes are often paid by the seller, but in some cases they may be payable when buying a home, adding to your total closing costs. It’s also good to at least know how much they are so they don’t end up being one of those hidden costs of selling a home. In places like New York City, that could mean an extra 1% to 2.625% of your sales price subtracted from your profit, in addition to real estate fees that usually run between 5% and 6%.

Are you buying in an attorney or escrow state?

Depending on where you purchase your rental property, you may need an attorney to handle your contract negotiations. That means higher costs than you’ll find in an escrow state, where an escrow offer can handle the signing usually at a much lower cost.

Are you buying in a community property state?

If you’re currently married or have a domestic partner, the community property laws could affect what happens to the property in the event of a divorce. Community property states require a split of equity down the middle, whereas the equity can be split up in negotiable amounts in a non-community-property state.

Final considerations

A little due diligence and research will help you avoid unpleasant surprises if you’re considering buying an out-of-state investment property. While many real estate companies offer “virtual tours” of homes, there’s nothing like an in-person tour to soak up the light, views, smells and feel of a home before you buy it.

If you can, budget enough time to take a trip to the state you’re considering buying in to inspect the top contenders before you start making offers on an out-of-state investment property.

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Denny Ceizyk
Denny Ceizyk |

Denny Ceizyk is a writer at MagnifyMoney. You can email Denny here

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