MORTGAGE MATTERS

5 min read

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Oct 2022

Great News About Closing Costs 

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WHAT YOU'LL LEARN

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What are closing costs?

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Who can help you pay them?

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Ways to budget to cover closing costs.

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WHAT YOU'LL LEARN

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What are closing costs?

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Who can help you pay them?

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Ways to budget to cover closing costs.

So you’ve found your perfect home, and you’ve been approved for a great loan that fits your budget. But you just learned there are “closing costs” you may have to pay out of pocket on top of your down payment and new mortgage. What gives?

What Are Closing Costs?

Closing costs cover services and fees like property taxes, homeowners insurance, title search, and appraisal. In general, you can expect to see between 2-6% of your purchase price in closing costs. When added to your down payment at closing, these fees can certainly add up, but there are ways to make them more manageable! So where do you find these fees, anyway?

Closing Costs on Your Loan Estimate

Your Loan Estimate will show you five categories of closing costs. Don’t hesitate to ask us about any fees you don’t understand.

1. Title fees (or attorney fees)

These fees ensure that the seller will transfer the title (deed) of the property to you without saddling you with any liens or issues attached to the property. It also protects the lender from these hazards.

2. Pre-paids and escrow (property taxes and homeowners insurance)

Paying pro-rated property tax and homeowners insurance premiums at closing ensures there are no gaps in coverage before your mortgage payments begin (thus, “pre-paid”). This may also include any interest between your closing and first payment. Most buyers include property taxes and homeowners insurance in an escrow account, so you will need to make an initial deposit of funds for any bills that need to be paid soon after closing.

3. Mortgage insurance

Many loan programs require additional insurance on the mortgage to ensure the loan is paid back if you defaultFailure to make monthly mortgage payments, which can cost you your home, as well as lower your credit score, raise the interest rate on other debts, and damage your future lending chances.defaultFailure to make monthly mortgage payments, which can cost you your home, as well as lower your credit score, raise the interest rate on other debts, and damage your future lending chances.. Government loans might call these “funding fees” or “guarantee fees.” Conventional loans with a down payment less than 20% come with more risk for the lender, so they require mortgage insurance. The good news is that you can roll these upfront fees into your total loan amount, so you don’t need to pay for them out of pocket.

4. Loan-related fees (lender fees)

These fees include any origination charges, the application fee, the processing fee, the credit report fee, and any discount points you pay to get a lower interest rate. Some lenders also include underwriting fees, wire transfer fees, termite inspection fees, and your appraisal in this category.

5. Property-related fees (may also be found in lender fees)

During the loan process, an appraisal will determine the property’s value. If your property is inspected for pests and any other structural, electrical, or plumbing issues, those items may show up as closing costs if you haven’t already paid for them prior to closing. You may also see a survey fee if there is a need to confirm property lines. Occasionally, you might see miscellaneous closing costs that don’t fit into these specific categories, such as a home warranty fee, courier fees, or wire fees. Again, ask us to explain any fee you’re not sure about.

Negotiating with the Seller to Pay Closing Costs

As a homebuyer, you can negotiate with the seller when it comes to who covers closing costs. Every loan has different guidelines about how much a seller can contribute (“seller-paids”):

Conventional:

  • Primary/secondary home with less than 10% down payment: 3%

  • 10-25% down: 6%

  • Over 25% down: 9%

  • For Conventional loans on investment properties, a seller’s contribution is limited to 2%, no matter the down payment amount.

FHA and USDA loans on primary residences: Up to 6% in seller contributions

VA loans on primary residences: Unlimited seller contributions, including up to two discount points. Sellers can also pay up to 4% in buyer discretion costs other than closing costs.

And there’s more good news…

Gift Funds and Down Payment Assistance

Gift funds are allowed for all programs (except Conventional investment properties), which means your family or another source can help you with some extra cash, depending on your program. You’ll need a gift letter and documentation from the bank for the transaction; we are happy to help.

And for certain loan programs, you can apply for down payment assistance, and these assistance funds can often be applied to your closing costs, too. These programs (also known as “secondary financing” or “secondary mortgage”) can be grants, tax credits, and low- or no-interest loans. These are typically reserved for “first-time” homebuyers, but that really just means you haven’t owned a home in the last three years.

Where can you find down payment assistance programs?

EXPLANATION

Down payment assistance programs are typically run by organizations like local or state housing authorities or nonprofits. Availability and qualification requirements vary by state. Employer assistance programs are another option. Ask us for help in locating a program that’s right for you. 

Savings Tips for Closing Costs

Saving money is always a great idea. Here are some tips for putting some extra aside for closing costs:

  1. Put your tax refund or bonus directly into a savings account.

  2. Cut back on some of your streaming services to free up some money—and time to dream about your new home’s décor!

  3. Make meals and coffee at home. Daily café visits and meals out can really add up!

  4. Watch your energy consumption. Turn off the lights, make sure doors and windows are sealed tight, and lower the temperature of your hot water heater to save a little on your utility bills. Plus, it’s great for the environment!

You don’t have to manage your closing costs alone! Just reach out, and we’re happy to help!