If you’re considering buying a home, you need to figure out how much more than your down payment you’ll need to cover the closing costs.
The first real shock I experienced when I shopped for my first home involved the closing costs. I did enough homework to already know the amount of the down payment I’d likely need.
The amount I’d need beyond that caused a good deal of anxiety.
All resources on buying a home talk about how much you’ll need to put down. That’s a given.
I mentioned in the last installment on this topic that you’ll need as much as 20% of the new home’s purchase price.
If you’re willing to pay private mortgage insurance, which can tack on $100 or more to your house payment, you can usually pay less than that daunting 20%.
If you’re a first-time homebuyer, you might be able to pay as little as 3% to 3.5% as a down payment. Your lender can tell you what your options are there.
But as I tried to do my homework to prepare to buy, I realized there’s critical information most resources don’t tell you up front.
My real-estate agent dropped the bombshell on me as we toured the first potential new home.
You’re going to need a lot more to cover closing costs.
Closing costs, as the name implies, are a series of fees you’ll pay when you close on the new home. The day you close on your home usually comes about 30 days after the seller accepts your offer. There are variables involved, so your lender will estimate the actual closing date.
At closing, you go to your real estate attorney’s office and sign a phone-book sized stack of legal documents. (If you’re young enough that you don’t know what a phone book is, Google it.)
Closing costs will include your actual down payment. Then you’ll pay various fees to your lender and your attorney. You’ll pay a portion of taxes and any homeowners’ association fees. Closing costs also include fees for title insurance, the loan application and recording and survey fees. The itemized list of things you’ll have to pay takes a while to read.
It takes even longer to mentally process!
Zillow gives a pretty good breakdown of the various things that go into closing costs.
When we toured that first condo, my real estate agent warned me upfront: I should plan on up to another 5% or so for closing costs.
People who shop for a new home seem to have this idea that the biggest financial challenge will be coming up with the down payment alone.
I hate giving such a hard reality check, but if you’ve never bought a home and are considering it, you need to know.
But there is some good news.
You can always ask the seller to pay some of the closing costs.
In my case, when I made an offer on the new home, I offered the seller’s price, but asked the seller to pay $5,000 toward closing costs. The seller agreed to pay $4,000. That was fine with me; I hoped they’d agree to at least $3,000.
You put down about $1,000 or so as “earnest money” when you make the offer. That money also goes to cover your closing costs. So with the $1,000 I had to pay and the $4,000 the seller paid, that covered the $5,000 target I estimated I would need beyond the down payment.
Without the seller covering some of those closing costs, I may well have been writing this from my old apartment where I was still renting.
Your real estate agent can help you strategize what to ask for when you make an offer to the seller. A good real estate agent can help you plan out how much things are likely to cost. That way, you can work together to figure out what to ask for.
The seller, of course, can always say no.
Fortunately, there’s more good news. If you have family members who can help, that’s also an option. A co-worker of mine bought his first home last year told me his parents helped him with the down payment. Mine helped me with mine.
The bank will likely want extra paperwork when that happens, but they’ve seen this many times before. They essentially want what’s called a “gift letter.” The letter explains where the money to cover the down payment and closing costs came from. Their underwriters want to make sure they know what’s going on when extra money suddenly appears out of nowhere in your bank account.
And believe me: they’ll want to examine your past bank statements! They’ll see that kind of financial assistance when it gets deposited into your account. You can bank on (see what I did there?) being asked to justify it.
Don’t be intimidated.
I know, I know. Every part of buying a home can be intimidating. It’s easy for me to say that now.
But that’s the point: I was just as intimidated as you may already be feeling. Do your homework. If your community has homebuying resources available, take advantage of them. If your bank has educational programs or can give you time with a mortgage officer, take the time.
But above all else, make sure you have a really good real estate agent to help you navigate these scary waters. You want someone in your corner who’s an expert on this kind of thing.
That will save you lots of money and lots of headaches!