If buyers can get together with a lender early in the home-buying process, they will be better prepared for the amount of money they will need to close on a purchase. A lender will tell them that the cost of buying a home with a mortgage is more than just the down payment.
The loan fees and associated costs will total anywhere from 3% to 6% of the loan amount. There are one-time mortgage-related closing costs, such as lender’s title insurance, appraisal fees, processing and underwriting fees, escrow or closing fees, attorney fees, notary fees and recording costs. There will likely be a loan origination fee and possibly a payment for discount points, both determining factors as to what interest rate the buyers will be paying for the loan. These fees are based upon a percentage of the loan amount.
Depending on the type of loan and the amount of the down payment, the buyers may incur the additional cost of mortgage insurance, which can be paid up front. For an FHA loan, the mortgage insurance premium is equal to 1.75% of the loan amount.
If the buyers are having their taxes and insurance escrowed, there will need to be funds to take care of these prepaids at closing. The time of the month that a sale closes also determines how much prepaid prorated interest the buyer is liable for at closing.
Any inspections of the property or home warranty plans are technically not closing costs but should be considered as part of the cost of acquiring a home. These are usually paid for at the time of inspection.
The financial burden of all of these costs at closing can be lessened if the lender extends closing cost credits to the buyers. The lender can waive the up-front loan origination, underwriting and processing fees as credits but will eventually recoup these costs by increasing the annual percentage rate (APR) of the loan to the buyer.
A buyer’s market can sometimes lend itself to buyers requesting credits from the seller during negotiations. If a seller is motivated to sell and the price is agreeable, then seller credits may be extended to the buyer. The seller will usually recapture the closing costs credits to the buyer by receiving a higher price for the sale. The seller wins by getting the property sold, and the buyer wins by not having to come up with as much cash at closing.
Lenders set limits on the allowable amount of seller credits, so buyers need to be sure that they request a lesser amount than what is anticipated on the lender “Loan Estimate.” The acceptable amount of a seller closing credit is determined by the type of loan. For example, an FHA loan allows up to 6% of the loan amount, while a conventional loan can vary from 3% to 9%, depending on the down payment amount.
Closing costs credits can be a great negotiating tool while enabling many buyers to better afford a home purchase. Please direct your buyers to me so I can show them how closing costs credits can benefit them.