Plan ahead for closing costs
Closing costs are easy to overlook when you’re buying your first home, as you’re probably most concerned about the house purchase price, your down payment, and the mortgage interest rate. But it’s a mistake to forget about closing costs, a sometimes-mysterious mix of fees, charges, and advance payments that, if not handled well, can make closing day a scramble.
Here are some tips on how to plan ahead for closing costs.
What Are Closing Costs?
Closing costs are fees and expenses that allow you to finalize a home purchase, including mortgage-related fees, property title insurance, and taxes.
Within three days after you file a mortgage application, you will receive an estimate of closing costs. The closing costs will be listed on the form as an exact amount or estimated range.
As you stay in communication with your lender leading up to the closing, you’ll find out if any of the anticipated costs change. Then, a few days before the closing date, you’ll get a closing disclosure that will confirm the fees you will pay. All of the payments on that form will be due at closing, so it’s vitally important that you prepare to cover the closing costs, which will likely come out of your down payment.
How Much Are Closing Costs for a First-Time Homebuyer?
Your closing costs will vary based on several factors, such as the size of the home, the down payment amount, type of loan you choose and what you’re able to negotiate with the seller.
Generally, closing costs run between 2% and 5% of the price of your home, which could be up to $10,000 for a $200,000 home. The average for a single-family property in 2018 was $5,779 including taxes and $3,344 without taxes, according to a 2019 survey by ClosingCorp, a real estate data firm. Costs can also vary by state. According to the survey, the highest-cost states were New York ($13,581) and Delaware ($13,309), while the lowest were Missouri ($1,887) and Indiana ($2,002).
Who Pays for Closing Costs in a Real Estate Transaction?
The contract drawn up around the purchase will determine which party incurs which closing costs (buyer or seller).
In the state of California, however, there are different county standards that determine who pays which closing cost.
For example, in Alameda the buyer is expected to pay the escrow fees, whereas in Alpine the buyer and seller split the escrow fees. Discover the division of closing costs by county in California so you can anticipate what you’ll be expected to pay.
When Are Closing Costs Due?
Here is a look at some of the most common closing-related costs. Some are paid days or weeks before the closing date, but many are settled on the day of closing.
Costs Before Closing Date
Costs at Closing
Can Closing Costs Change?
The closing cost estimate you receive right after you apply for your mortgage should be very similar to what you end up paying at closing. But you could run into a few surprises along the way.
It’s a very dynamic process, and there are a lot of moving parts between the application and closing, such as the appraisal and home inspection.
Here are a few examples:
- A home could appraise for less than the sales price, which could spur both parties to renegotiate the sales contract and possibly change the home price.
- A title search could turn up a problem that has to be addressed, such as a lien on the property.
- You could change the type of loan – such as fixed versus adjustable rate – or the amount of down payment.
- The credit review could show there are issues with your credit history.
Lenders are allowed to change closing costs if there is a change in circumstances, such as sales price. Some fees, such as ones for the lender and transfer taxes, cannot increase.
How Can First-Time Homebuyers Reduce Closing Costs?
Negotiation and comparison shopping can help reduce – or even eliminate – some closing costs for first-time homebuyers.
Why Should First-Time Homebuyers Plan for Closing Costs?
When first-time homebuyers budget for a down payment, they need to account for closing costs as well as how much money they’ll need to keep up the property.
You don’t want to walk into a house and have zero in your savings account because everything was spent in buying the house.
A 20% down payment is often considered ideal for a home purchase because it eliminates the need for mortgage insurance payments. But it’s difficult for many first-time homebuyers to come up with that much money for the down payment, plus handle all the closing costs. In that case, it’s OK to have less than 20% down and pay some mortgage insurance for a while.
It’s ideal for homeowners to reserve two to three months’ worth of their regular monthly payments when they move into a home. It’s a good rule of thumb to save 1% of the value of the home each year to pay for upkeep. You can have ongoing maintenance and costs that a lot of folks don’t realize.
Can First-Time Homebuyers Get Closing Cost Assistance?
There are many programs throughout the country offered by government agencies and nonprofits that are designed to help first-time homebuyers, especially those with low and moderate incomes.
Financial institutions are often aware of these programs and will incorporate them into their discussions with you when you line up your financing. Lenders will try to understand homebuyers’ budgets, what they can afford, and whether they qualify for assistance programs.
Assistance could come in different forms:
- Down payment grants
- Forgivable second mortgage programs
- Matched savings programs
If you give yourself enough time – about six months ahead or more – you can find the resources you need and make sure your credit is strong enough to make it work. Meet with a lender and also with a housing counselor at a local nonprofit that is designed to help prospective homebuyers. You have to take everything into consideration before you go shopping.
After all of your planning, you might still come up short. That’s when you might need to get help from a parent or relative to cover the shortfall, which you can disclose in a gift letter. A 2019 report from the National Association of Realtors found that 28% of homebuyers 28 and younger had help with their down payment from a friend or relative, as well as 21% of buyers between 29 and 38.
These are things you need to have lined up and have a strategy on how you’re going to do this. It’s not something where you can wake up Saturday morning and say you want to buy a house.
Closing on a home is often the biggest transaction people make in their lives. Make sure you’re in good hands with a transparent California escrow company that allows you to e-sign documents and keep track of the progress of your escrow every step of the way.
Get in touch with the Gabe Mendez Group today and see how we can help.
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