HAVE YOU SAVED ENOUGH FOR CLOSING COSTS?
There are many potential homebuyers, and even sellers, who believe that they need at least a 20% down payment in order to buy a home or move on to their next home. Time after time, we have dispelled this myth by showing that many loan programs allow you to put down as little as 3% (or 0% with a VA loan).
If you have saved up your down payment and are ready to start your home search, one other piece of the puzzle is to make sure that you have saved enough for your closing costs.
Freddie Mac defines closing costs as:
“Closing costs, also called settlement fees, will need to be paid when you obtain a mortgage. These are fees charged by people representing your purchase, including your lender, real estate agent, and other third parties involved in the transaction.
Here in Los Angeles, a buyer’s closing costs are usually between 1-3% of the purchase price. The range largely depends on the price of the home, your specific loan program, and if you are choosing to pay your property taxes and homeowners insurance through an escrow account arranged by your lender (so that a portion is paid monthly with your mortgage).
We’ve heard from many first-time home buyers that they wished that someone had let them know that closing costs could be so high. If you think about it, with a low down payment program, your closing costs could equal the amount that you saved for your down payment.I can help you ballpark how much you need based on your situation, typical closing figures, and numbers from your lender.
Here is a list of just some of the fees/costs that may be required before close of escrow:
Government recording costs
Credit report fees
Lender origination fees
Tax service fees
Homeowner’s Association fees
And interest on your loan prorated from the day your loan funds until your first regular billing period.
The total amount can range from just a couple thousand to tens of thousands depending on the property you are purchasing, but typically less than 1-3% on homes in the $500,000 to $2,000,000. Yes, that is a large range. We can narrow it down further if we know your budget, your loan program, what time of year you are closing and whether you are pre-paying homeowners’ insurance and property taxes.
Is there any way to avoid paying closing costs?
YES! While you will still have some costs associated with buying a house, there are several ways you can minimize your out of pocket expenses. Work with your lender and real estate agent to see how you can decrease or defer your closing costs. There are no-closing mortgages available, but they end up costing you more in the end with a higher interest rate. Or you can wrap the closing costs into the total cost of the mortgage (meaning you’ll end up paying interest on your closing costs). We can also negotiate with the seller over who pays these fees. Sometimes the seller will agree to assume the buyer’s closing fees to get the deal finalized.
Additional Out of Pocket Expenses
In addition to closing costs due just before you complete your transaction, you will also have out of pocket expenses during escrow. Typically you will pay for your home appraisal through your lender by credit card and will pay any property inspectors either by credit card or by check and sometimes Venmo. You’ll want to budget at least $600 for a general property inspection and termite inspection, and and additional $600 for sewer and chimney inspections when buying a house. Other reports, like foundation, roof, arborists, surveyors and so on, vary in cost from free to hundreds and sometimes more, and are typically ordered on a case by case basis.
Money for free?
In addition to any credits you get from the Seller or combined into your loan, most buyers who are renting will get their security deposit refunded from their landlord after they move into their new home. Typically a landlord has 3 weeks to get that to you after your lease ends. For some, that’s enough for their first month’s mortgage or moving costs. Unlike rent which is paid at the beginning of the month, mortgages are like credit cards: they are billed at the end of the billing period instead of the beginning. You will not have to make your first mortgage payment until after the first billing cycle—it will feel like you’ve skipped a payment. None of this is free money. It all balances out in the end, however, much of your closing costs and mortgage interest may be tax deductible. Speak with your tax advisor to confirm your tax savings and see if you can adjust your witholdings on your paycheck so that you have fewer taxes taken out of your paycheck each month to account for any tax savings you might qualify for by owning a home.
Make sure you budget enough for your down payment, inspections, moving expenses, and closing costs. You can get help for some of it. Speak with your lender and agent early and often to determine how much you’ll be responsible for at closing so that you can prepare acordingly.