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Being a homeowner can be an expensive investment which is why it is so important to get cheap closing costs when buying a home. With the current prices of homes in Michigan at the lowest points in years, many people are taking advantage of the economic downturn and becoming home owners. The price of the home is not the only factor you should be concerned of when buying a house. Getting affordable closing costs can save you thousands of dollars when closing on your purchase.
The first thing to know is what costs are involved as a buyer to purchase a home. Many people may be aware of down payment requirements for most programs however other costs can add up quickly. These costs include lender fees, inspection fees, title fees and prepaid items.
What are down payment requirements?
When purchasing a home there are many options to consider for mortgage types, each of which have different down payment requirements. A licensed loan officer will be a great resource to help pre-approve you and recommend the best mortgage for your credit, income and savings.
A conventional mortgage is the most popular product however it may require anywhere from a 3% to 20% down payment depending on what bank you work with an your financial situation. Another popular mortgage option is a FHA mortgage which is more forgiving based on credit issues and requires only a 3.5% down payment. Another great mortgage product these days is a USDA Rural housing loan which is a zero down mortgage (more information on buying a home with no down payment). There are pros and cons of each product so be sure to do your research to make sure you know what is best for your situation.
What are Lender fees?
Depending on what lender you work with, you may have a substantial amount of fees from your Mortgage Company or bank when buying a home. It is no mystery that banks will make money off your mortgage however it is important to know how much you are being charged. Lender fees may include, underwriting fees, origination fees, discount points and even other miscellaneous fees.
Be sure to ask your loan officer what your lender fees are and ask if there are any ways to have these reduced. For example, your loan officer may have programs to offer you zero cost mortgages which will save you money out of pocket.
Many borrowers are focused only on the interest rates that they are offered and simply go with the lowest rate option given to them. This could be a huge mistake. Working with a good mortgage broker or mortgage company, you may be able to get thousands of dollars credited back to cover your third party closing costs and get a free mortgage. While other options may have a slightly lower rate, it would take you decades to recover the cost saving you could have up front when buying a home.
What are Inspection fees?
Inspection fees include optional home inspections such as pest inspections, water tests, and general home inspections and lastly the required appraisal inspection. Buying a home might be the largest investment of your life so it is important you know exactly what you are buying. It is recommended that you pay for optional inspections to make sure there are no electrical issues, plumbing issues, or structural issues that may result in thousands of dollars of costly repairs. Other issues such as rodent infestations and termites may be issues that will get worse over time and lead to more expensive repairs if not treated properly.
What are title company fees?
The title company is a third party company that will handle the escrow transaction and provide an insurance policy that there are no other liens attached to the home when you purchase it. The cost from Title Company to title company can vary greatly so it is important to remember that this is a shoppable service that you can select.
Title company fees may include a closing fee, escrow fee, title insurance, recording fees, notary fees, courier fees and others. These fees can add up to thousands of dollars and are often overlooked by buyers as they complete their purchase. It is recommended that you ask your loan officer for recommendations for title companies so you can be sure you are getting a fair deal. Remember that you DO NOT need to use the seller’s title company.
What are prepaid items?
Prepaid items are costs that are required to be paid in advance when closing on your home purchase. Prepaid items include taxes, insurances and escrow fees. Although these are not technically fees they are costs that are required to be paid at closing which may add up to thousands of dollars.
If you do not have a large down payment (typically 20%) you will be required to have an escrow account set up with your mortgage. An escrow account is an account that your mortgage company holds for you to pay out your taxes and insurances when they become due.
When closing on your home purchase you will be required to pay any taxes and insurances that are currently due or that may become due within the next 90 days. Your escrow account will need to be established so that when your next bill is due, your account will have enough money to pay the bill.
A couple of tips to keep your prepaid items at their lowest is to make sure you use your homestead exemption if you are buying a house as your primary residence. This is a tax break that will save you around 30% off your property taxes. Another tip is to call around and get more than one home owners insurance quote. Be sure to compare the save coverage amounts and don’t just pick the cheapest one unless it offers the same coverage. These tips for saving on prepaid items can add up to thousands of dollars in savings at the closing.
Now that you know what costs are involved when buying a home, we can discuss how to get these costs paid for you by someone else! There are a few ways that might cover your closing costs including seller concessions, lender credits or a gift from a family member.
What are seller concessions (seller paid closing costs)?
As a buyer, you may be able to get your closing costs paid for you by the seller simply by putting this in your purchase offer. If you are short on cash but are otherwise ready to purchase a home, then this may be a great tip to reduce or even completely wipe out your closing costs at the closing of your home.
It is common for buyers to ask for up to 3-6% of the purchase price to be paid for by the seller. Be sure to speak with your loan officer and make sure your lender will allow you to receive seller paid closing costs. You also do not want to ask for too many costs to be paid for on your behalf if you cannot use the full credits. For example, if you ask the seller to pay $5000 of your costs but your costs are only $3000 then you may be throwing money out the window. It may be better to ask for $3000 in costs and reduce your offer price by $2000.
What are lender credits and how does it help me?
A lender credit is money credited back to you from your mortgage company that can pay for third party costs and fees. Working with a good mortgage broker or mortgage company, you may be able to get money credited to cover your closing costs. Typically you can get a slightly higher interest rate and get large credits toward your costs which will reduce the amount of money you need at the closing. As discussed above, a $5 more payment may get you thousands of dollars which is an easy decision if you are not going to stay in your home for more than 5-10 years.
What is gift and how does it work?
While this may not be the best solution, if all else fails there is always asking mom and dad for a gift for your down payment and closing costs. Many mortgage programs allow buyers to get a gift from a family member or close friend to cover the closing costs, down payment and prepaid items that are often necessary when buying a home.
There is a very specific process that needs to be follow when getting a gift so be sure to speak with your loan officer and get advice on how a gift needs to be handled. Be sure to tell mom and dad thanks for the extra help. One tip when asking for a gift is to point out that they may be living with you someday!
Following these tips on getting cheap closing costs can save you thousands of dollars on your home purchase. The extra money saved may be the trick to allowing you to buy the home of your dreams years sooner. For additional information on how to save on closing costs contact a Riverbank Finance loan officer by calling 1-800-555-2098 or submit a request below.
For more information read: Tips for First Time Home Buyers
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