If you’re getting ready to buy a home, you’ve probably heard someone talking about closing costs. But do you know what they are, when they’re due, how much you’ll have to pay, and most importantly, where the money will come from? There’s a lot to learn, but you’ve come to the right place for all the answers!
What’s included in closing costs?
In addition to saving money for the down payment for your home, you’ll be expected to pay some extra costs before you get the keys. These charges may include:
- Homeowner’s insurance that protects your home and belongings from damage and theft.
- Title insurance that protects both the buyer and lender from defects in the title such as liens or back taxes.
- Private mortgage insurance (PMI), required by some types of loans when your down payment is less than 20%.
- Any property taxes levied in your area.
- Professional fees for your appraisers, surveyors, and loan processors.
- Any points you’ve agreed to pay to get a lower interest rate on your mortgage.
When are closing costs due?
As you might guess, closing costs are due when you sign your paperwork on closing day. You should bring a check from your bank to pay for the total amount you owe (and make sure you have enough in the account to cover the full amount!). Also, keep in mind you may be able to roll some of your expenses into your mortgage; your loan officer can give you the details and give you an estimate of how much money you will need on closing day.
How much will your closing costs be?
These costs usually run between two and five percent of your loan. In other words, if your mortgage is $100,000, your closing costs will range between $2,000 and $5,000. Check the Loan Estimate your lender sends you when you apply for a loan to find your exact costs.
Where should the money come from?
After saving up for your down payment, you may wonder how you’ll pay for your closing costs, too. But fortunately, there are many resources to help you come up with these funds. Here are some of the possibilities:
- Pay with your personal checking or saving account. If you have enough money saved up, this method is simple. Remember, these funds need to be in your bank account for a minimum of 60 days before you accept a seller’s offer. Lenders will check this by looking at your bank statements for the past two months to show that the funds have been properly “seasoned.”
- Transfer funds from your business account. If you own a business, you can move money from your business account. However, you’ll want to send it directly to escrow (instead of your personal account) so you can use it right away, instead waiting 60 days to season the money. Ask your loan officer for instructions on how to make the transfer.
- Roll the costs into your mortgage. With some types of loans, you can spread out the costs of closing over time by adding them to your loan. The benefit is that you don’t have to come up with extra cash by closing day, but the drawbacks are that you’ll end up paying more over time due to interest. If you’re interested in this option, ask your loan officer if your mortgage qualifies.
- Ask the seller to cover part or all the closing costs. In a buyer’s market, the seller may be willing to help you with closing costs to finalize the sale. However, in a seller’s market, this may make your offer less attractive, causing the seller to choose someone else. One way to get around this is by increasing your offer to help make up the difference. Before suggesting this, ask your loan officer if the mortgage you’re using qualifies.
- Use gift funds from your family or significant others. Lenders will allow you to accept money from your relatives and other people who are close to you (depending upon your loan type), as long as they document the process with a Gift Letter. (Ask your loan officer for a form letter you can use to make the process easy.) Again, this money should be paid directly to escrow, not your personal account, so you won’t be delayed by the need to “season” it.
- Take advantage of government-sponsored down payment assistance programs. Who knew there were so many organizations designed just to make buying your home easier, especially if you’re a first-time buyer? Check our list to find programs in your area. Many of them offer free grants that don’t need to be repaid, along with low-interest or forgivable loans that can reduce or help eliminate your financial burden.
- Ask if your employer offers assistance. Some companies offer help with down payments and closing costs as one of your benefits. Feel free to ask your HR department, and if the program is available, check with your loan officer about how to document the gift.
- Sell your personal property—or get a secured loan on something you own. One more way to come up with extra cash is to act as your own bank. Look around for high-value items that you can sell or use as collateral for a loan. But remember to transfer the funds at least 60 days before closing so you can season the money, and keep receipts so you can prove where the funds came from.
Once you start looking, you’ll see that there are many options for paying your closing costs, making the process of buying a home of your own that much easier. Ready to take the next step? Get in touch! We’re always here to help.