Closing costs explained
[an error occurred while processing this directive]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 to get the Good Faith Estimate (GFE) from your Lender. Review
it and compare it to the typical
closing costs listed at Yahoo. Direct any questions about it to
your lender and your realtor (not to me).
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.
If you liked this site then you might like some of my other sites:
How to Find Cheap Airfare How to Save Electricity How to get listed & ranked well in Google
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