BUYER’S ARTICLES – FOR THE SMART CONSUMER
Closing costs are out-of-pocket expenses paid by a homebuyer before the property transfer is finalized. Many expenses are associated with buying a home in addition to the cost of assuming a mortgage. Closing costs can vary significantly from one transaction to another, and often depend on a number of factors, including the price of the home, the area in which you are buying, and the type of mortgage that you have selected.
Yet closing costs are not the only upfront expenses that will need to be paid when you are purchasing a home. You may be required to make a down payment, pay for a home inspection, cover escrow fees, make advance deposits, and incur other types of miscellaneous costs.
Realtors are knowledgeable about the out-of-pocket costs that buyers face when purchasing a new home. The have extensive experience dealing with closing companies, different types of mortgage programs, and escrow accounts. Therefore, your realtor can be a source of valuable information about buyers’ costs.
This list of possible fees covers many of the items for which you will need to have cash on hand, although it may not be an all-inclusive list. Fortunately, you probably will not be subject to all these types of costs. The specific costs will depend on your particular situation.
Closing costs are those costs paid by the buyer to the closing company that finalizes the home-purchase transaction. Some sellers will offer to pay a portion of the buyer’s closing costs. In addition, some mortgage programs will offer funding for closing costs, often in the form of a second mortgage or a line of credit.
Down payments are not considered to be part of the closing costs, even though they are generally due on or before the date of closing. Again, assistance programs are available for paying these costs. Particularly if you are a first-time buyer, it makes sense to research all the available options.
Your realtor can offer extensive information about specific first-time homebuyer assistance programs and can assist you in determining whether the seller is willing to assume some of your closing costs.
A down payment is usually required by your mortgage company. Some lenders may have special loan programs that offer a 0% down payment. However, you can generally assume that you will be responsible for providing at least a small percentage of the home’s cost as a down payment.
There are federal and state restrictions on the sources of funds that a buyer can use for a down payment. Lenders may have additional criteria and restrictions. To use gift funds for a down payment, a buyer usually has to have had that money in his or her possession for a certain period of time.
Investigate down-payment requirements when you are shopping for mortgage programs. This is often a good way to determine which program is best for your specific situation.
In most real-estate transactions, the buyer hires a professional home inspector to perform a detailed inspection of the property that he or she wishes to purchase. The buyer is responsible for paying these home-inspection costs. Spend as much as necessary to obtain a high-quality inspection from a certified inspector. The up-front investment can help you avoid incurring significant additional expenses in the future.
Your mortgage lender will probably require an appraisal inspection in addition to the home inspection. The purpose is to evaluate the true worth of the home that you are buying. A lender will not want to lend you an amount that is significantly greater than the appraised value. Situations vary, and depending on the home’s location and your lender’s rules, the amount that you can borrow will vary.
Private Mortgage Insurance
Private mortgage insurance is an expense that potential buyers hope to avoid. It is not required for all mortgage-based home purchases. Whether you will be required to have this insurance depends on your financial situation and your lender’s policies.
Private mortgage insurance (PMI) is a cost associated with taking out a mortgage when the buyer is unable to provide what the lender considers to be a suitable down payment. Usually the cost of PMI is wrapped into your monthly mortgage payment, but you will probably need to pay an upfront PMI application fee.
New Construction Inspections
This up-front-cost will be part of your costs only if you opt to build a new home. Most mortgage lenders insist that you independent inspections are conducted throughout the home-building process in order to protect their, and your, interests.
Some lenders require that buyers pay the interest accrued from the closing date to the date of the first mortgage payment on or before the day of closing. Your lender will be able to provide you with that amount well in advance of the closing.
Credit-Report and Mortgage-Application Fees
Some lenders will waive these fees or wrap them into the amount of the mortgage payment. A credit-report fee is charged to a mortgage applicant to cover the costs of pulling the potential borrower’s credit report as part of the application process. This fee should never be significantly higher than the actual cost of the report. Read your lender’s fee disclosure carefully before selecting a mortgage program. Ask your realtor about ways to decrease the credit-report fee assessed by most lenders.
A mortgage-application fee is basically the cost of doing business for a potential mortgage borrower. This fee is assessed by the lender in order to cover the clerical and administrative costs associated with processing a mortgage application. Again, your realtor may be able to assist you in finding ways to reduce these costs.
Depending on where you are purchasing a home, you may be required to pay a transfer fee to cover the cost of transferring property records from the seller to you, the new buyer.
Impact Fee (Home Association Fee)
This fee is applicable only if you are purchasing a town home, a condo, or a house that is governed by a homeowners’ association. Your realtor can help you evaluate the associated fees and determine whether you would be responsible for paying them. Impact costs are almost always paid on the day of closing, but the actual amount will depend on the specific circumstances.
This list of buyers’ costs is not all-inclusive, but it does include the most common costs that a homebuyer needs to pay before the home transaction is finalized.
Many years of experience have taught realtors to find out whether sellers might be willing to reimburse you for some of your out-of-pocket, up-front expenses. They also know ways to get the costs included in your mortgage amount.
Buying a home requires a tremendous amount of research. By being prepared to cover the miscellaneous upfront costs of your home purchase, you will save a significant amount of interest in the long run.