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« Back: Qualifying
for a Loan « » Next:
Get your finances
in order » In addition to the down payment, you'll also
have to pay closing costs -- miscellaneous fees
charged by those involved with the home sale (such
as your lender for processing the loan, the title
company for handling the paperwork, a surveyor,
local government offices for recording the deed,
etc.). The amount varies, but could be, say, $6000
on a $130,000 house. The range is all over the map
-- from 1 to 8% of the price of the home, though
more typically 2-3%. These costs are significant --
especially after you've already had to come up with
a lot of cash for the down payment. Your lender will give you a more accurate
estimate of closing costs on the purchase of a
particular house you've selected. (Don't ask me
about this, ask your lender.) This is called a
"Good Faith Estimate". If they don't give it to
you, ask for it. Yahoo has a good page which summarizes
typical
closing costs. Tip:
Make sure there's no Yield Spread Premium on
the GFE. If you use a mortgage broker and
get a bad deal with an interest rate that's too
high, the bank will give a kickback to the
broker called a Yield Spread Premium (YSP). If
you followed my advice on shopping
for the best mortgage deal you're less
likely to be in this position. If there's a YSP
on the GFE, then you're paying too high an
interest rate and should try to negotiate a
lower one. Here's more on YSP's from ERate,
Realty
Times, and Wikipedia. Tip:
Roll in the closing costs into the mortgage.
If you don't have enough cash to pay the
closing costs, you can often get the closing
costs added to the amount of the loan. For
example, if the loan amount is for $150,000, and
the closing costs are $4500, you'd add the
closing costs to the loan amount so you'd
actually be borrowing $154,500 total. This is
handy if you're short on cash after making your
down payment. You need two things to be able to roll in
your closing costs like this. First, you have to
qualify for the bigger loan. If the bank will
only loan you $150,000 from our earlier example
and not a penny more, then you've already hit
the maximum they're willing to loan. But don't
get discouraged, because it's usually not a
problem to get the bank to loan you a few
thousand extra dollars extra. The second thing is that the new loan amount
can't exceed what's called the Loan-To-Value
ratio (LTV), which is the amount of the loan
compared to the to the value of the house, based
on the appraisal. In simple terms, let's say the
house is worth $100,000, and the bank will loan
up to a 95% LTV, meaning they'll loan you up to
$95,000. If your credit isn't so good then the
bank might only loan up to an 80% LTV, meaning
they'll loan you only $80,000. Don't confuse the price of the house
with the value of the house. The bank
gets the value of the house -- what they
think the house is worth -- from the appraisal,
which is a report prepared by a professional
which estimates the value of the house. The
selling price could be higher or lower than the
appraised value. Okay, so the point of all this is, if you
roll the closing costs into the mortgage, the
new loan amount can't exceed your LTV. If the
LTV amount was $120,000, and the $4000 closing
costs would push the loan amount from $118,000
to $122,000, then the bank won't let you roll in
the closing costs. You could get around this by
making a larger down payment, so you don't have
to borrow as much money from the bank, but if
you have the extra money for the bigger down
payment then you also have the extra money to
just pay that money towards the closing costs
instead of rolling them into the mortgage in the
first place. One way of rolling the closing costs into the
mortgage is to have a seller concession.
It's a little complicated so I recommend you
just ask the lender if you can roll the closing
costs into the mortgage the easy way. The lender
might require that you use the seller concession
method, though. If you have to go that route,
the way it works is that you and the seller say
that the sale price will be about 6% more than
the price you agreed on, and then the seller
"gives" you that extra 6% that you paid. For
example, let's say the price was $100,000 and
you're putting 10% down, or $10,000, so you're
getting a loan for $90,000. You and the seller
decide to go the seller concession route, so you
agree that the price should be 6% more, or
$106,000. That means you'll now put $10,600 down
and get a loan for $95,400. See what happened?
You got a loan for $5,400 more than the original
loan. That's what you use to pay the closing
costs. The seller doesn't keep the extra money
because part of the deal is that (s)he gives
that extra money back to you at closing. Tip:
Ask the seller to pay some of the closing
costs. If you're short on cash for the
closing costs and can't roll the closing costs
into the mortgage, ask the seller if they're
willing to pay part of the closing costs. It's
not unusual for buyers to ask for this. Usually
the worst that can happen is that they say
no. Tip:
Get the lender to pay the closing costs.
If you're short on cash for the closing
costs and can't roll the closing costs into the
mortgage, some lenders will pay part or all of
the closing costs, but in exchange you'll have
to pay a higher interest rate on the loan,
perhaps 0.25% or 0.50% higher. Ask your lender
if this is an option if you need it. Tip:
Borrow the money from another source. If
all of the above fails, try to borrow the money
for the closing costs from another source, such
as your parents. . « Back: Qualifying
for a Loan « » Next:
Get your finances
in order » |
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