Don’t Let Closing Costs Take You By Surprise
Buying a house is expensive. Not only because you're acquiring long-term debt, but also because of the costs associated with the actual home purchase. If you’ve done your homework and know about the buying process, you’re likely anticipating a down payment between 3.5% and 5% depending on your mortgage loan. So if you're buying a $200,000 house, on the low end you can expect to put down at least $7,500.
But the down payment isn’t the only cost of buying a home. You're also responsible for closing costs, which are fees related to getting the mortgage. These include the loan origination fee, discount points, appraisal, title search, insurance, survey, taxes and other third-party fees.
Closing costs aren't anything new, but according to a survey conducted by ClosingCorp., “over half of all homebuyers are surprised by the closing costs required to obtain their mortgage.”
About 17% of homebuyers were surprised that closing costs were required, while 35% were surprised by the amount they had to pay. Closing costs vary, but can average between 2% and 5% on the sale price, although percentages can go higher. This is on top of the down payment. So it’s no wonder why some would-be buyers believe homeownership is out of reach.
But while coming up with a down payment and closing costs can present a financial challenge, there are ways to get around a lack of cash. Rather than put off buying until you save more money, here's what you can do.
1. Seller Contribution
Everything is negotiable when buying a home. You can offer less than the asking price, ask for appliances with your offer, as well as ask the seller to pay all or a percentage of your closing costs.
They aren’t required to pay your costs. But some sellers may fork over the cash if they’re motivated or if their property isn’t receiving a lot of interest. In this situation, it’s easier to persuade a seller to pay your fees. Even if the seller only contributes a small percentage toward your costs, that's less money you have to spend at closing.
Understand that different mortgage programs allow sellers to contribute different percentages toward closing. The maximum a seller can contribute with a conventional loan is between 3% to 9% depending on your down payment. With an FHA home loan and USDA home loan, the seller may contribute up to 6% of the sale price.
2. Financial Gift
Certain programs also allow borrowers to use financial gifts toward closing costs. There are specific rules for using a gift, however. For starters, the person donating the money must be a blood relative, although there are some exceptions to this rule. Some programs allow a godparent or organization to contribute to a borrower’s mortgage costs. The person donating the money must provide their personal information including bank account statements, as well as a written letter promising that the gift isn’t a loan and doesn’t need to be repaid.
3. Lender-Paid Closing Costs
In some circumstances, you can negotiate lender-paid closing costs. This can ease the financial burden when buying a home, allowing you to purchase sooner or spend less of your own cash out-of-pocket. Just know that lender-paid closing costs often involve a higher mortgage interest rate to compensate for not paying your own closing costs. A higher interest rate increases your mortgage payment and the amount you pay in interest over the life of the loan—essentially increasing your total loan cost.
Closing costs can be an unexpected surprise when purchasing a home. If you’re thinking about buying your first home, but can’t seem to grow your account, it might seem as if you'll never be able to purchase a home. But rather than give up on the dream, contact Cherry Creek Mortgage to explore your options.
We offer several niche programs designed specifically for people with limited funds, as well as programs to help first-time homebuyers. We’ll show you different options and help you choose the one that’s right for you.