"Closing costs? What is that? Is that my down payment? I have that. Is there more I should know about? Is the home inspection included in this? What is Private Mortgage Insurance? Where does this come in to play? How am I suppose to know all of this? I don't understand!"
First time home buyers don't know what to expect when they are buying a home. I frequently get questions about closing costs and what is included, and if there are other costs involved. I have had buyers tell me that they or someone that they know had purchased a home and when they went to the title company to sign and close on a home only to find out then that there down payment was not the only money that they had to save up! No one had told them about the "other" costs. They only knew about the down payment. How can this happen!!?
I frequently explain the home-buying process to first time home buyers and include explanations of closing costs as well as other costs involved with buying a home. But the problem is this is a lot to take in during one conversation. It can be overwhelming, making the inner child within each of us imerge. We want to yell "I don't understand! I can't remember all that you just explained to me! This is just too much! I am going to just break down and cry!"
I always tell my buyers not to worry if they have to ask me the same questions over and over! This is a lot to take in all at once. Even people who have purchased homes before don't always know all of this because they limped through the process the first time!
Fortunately the lenders are required to give the buyers a "good-faith estimate" in the beginning of the loan application process! But I still get calls from confused buyers. Lenders have had to do this for awhile, but in the past I know there were buyers that never remembered seeing them till closing.
So pull up a chair and sharpen your pencils because we are going to have a simple "Understanding Closing Costs Class -101"!
I will try to keep this simple so not to confuse you further! So you have applied for a home mortgage, and you are not sure of what else you need to know. Qualifying for the mortgage and having a down payment is only part of the costs of buying a home. There are other costs that you should be aware of so that you can know what is involved and be able to discuss some of them with your lender. You also need to know that there are other costs that you will incur during the home buying process!
DOWN PAYMENT: The amount of the down payment will vary depending on the price of the home and the type of loan that you are applying for. If you are applying for a FHA loan, your down payment will be 3.5% of the purchase price. If you were buying a home that is $100,000 that would mean your down payment would be $3,500.00. You could be applying for a 20% down conventional loan to avoid the private mortgage insurance, which would mean that your down payment on home that was priced at $100,000 would be $20,000. There are many different loan types and you will want to ask your lender what is available to you in your specific situation.
PRIVATE MORTGAGE INSURANCE: (PMI) This is insurance that lenders require on a loan where buyers put less than a 20% down payment. This insurance protects your lender if you default on the loan. They can re-coop part of their loss in they have to foreclose on the home. This normally becomes part of your loan/payment.
LOAN ORIGINATION and POINTS: This is a cost you will want to understand and discuss with your lender. You may have agreed to pay "points" in order to get a lower interest rate. If your loan was $100,000 and you agreed to pay 1 point, then this is the same as 1% of the loan amount and would $1,000. The loan origination fee is a fee that the lender can charge to underwrite and process your loan. You can ask your lender the difference in a loan if you have these fees and what the payment will be versus a loan with no points and no origination fee.
LENDER FEES: These are fees that you can compare between different lenders. They have different fees and some might call them one thing and then they may be called something else at another lending institution. What you want to ask is what are your lender fees? (Such as underwriting, processing, tax service, etc.) If they say they don't have fees, then ask them if their fees are rolled into the interest rate. If they don't have fees sometimes this is because they have increased the rate slightly. They will give you a breakdown of the fees they charge though. Your Realtor can help you compare them between different lenders.
CREDIT REPORT: Your lender will pull your credit report for you and see if you have any issues to keep you from buying a home. Some items can be corrected, but if not, it is easier on you to know this BEFORE you start looking for a home only to fall in love with one and then have them tell you that you can't have it! The fee for this is minimal and varies per lender. They will also check your credit score to see if your score fits within the guidelines for a particular loan type. You need to speak to a lender before writing a contract so that the lender gives you a Loan Status Report that goes in with your offer on any home. This is also important because you need to know what type of loan you will be getting so that your Realtor can write the contract up reflecting the proper loan terms.
APPRAISAL: The appraisal is ordered once you find a home to purchase and is used to protect the lender. They will only invest a percentage of what the appraised value is. So if you purchase a $100,000 home and are getting a loan with 20% down they will only lend 80% of the appraisal amount. If it appraises for $100,000 there is no problem. If it appraises for $90,000. then they are only going to finance 80% of $90,000, so if the seller doesn't lower the price of the home to $90,000 or if you can't come up with the difference then the purchase is going to fall apart and you will be looking for a different home to buy. An appraisal fee will vary but is will be approx $450 and many lenders require this fee be paid upfront.
HOME INSPECTION: After you have a contract accepted by the seller you have your inspection period where you can have a home inspector thoroughly go through the home and look for all negative issues that may require a repair. This is important to do so that you know what you are buying and you may find a serious issue that would make you decide not to buy the home. Better to find this out now! But normally you may find some issues that are not too serious and you may negotiate with the seller to see if they will make any repairs or you may decide to buy the home and take care of the issues later. Lender owned homes and short sales will require the home is being sold "as is" but you still get to do an inspection and if you don't like what you find you can cancel the contract and get your earnest money back. A home inspection will vary depending upon the size of the home, but roughly will cost between $275 to $500 for most first time home-buyer inspections. Very large homes will cost more.
EARNEST MONEY: This is the amount that is given to the title company (that was written in the contract) to show the seller you are earnest about purchasing the home. If all parties agree to the contract then the earnest money check is taken to the title company for holding until closing. This is given to them with a copy of the contract and you may hear the term "opening escrow". They will give a earnest money deposit receipt for the money. This money is normally applied toward your down payment and or closing costs.
TITLE COMPANY FEES: The fees at title for providing a clear title report and insurance that covers this. If a lien would be found after your purchase the home that wasn't found prior to closing then the title insurance would be what was used to cover this and pay it off. This fee varies depending upon the cost of the home. But will be several hundred+ dollars. There is also an escrow fee for handling the escrow. Buyer and seller normally each pay half (except for a VA loan- here the seller pays both sides). Escrow fees will be a approximately two or three hundred dollars. There will be a recordation fee to record the deed in your name, some will have a notary fee but both of these fees are minor and may total $40 to $60 dollars. They may also have a couple other small fees such as a courier fee but they don't amount to much (under $100).
HOA TRANSFER FEES: If you purchase a home in a community that has a Homeowners association there are fees involved with transferring the home into your name and sending the paperwork to title. This is normally negotiable as to whether buyer or seller pays them. This varies greatly in costs in each community.
HOME WARRANTY: You can also purchase, or have the seller purchase for you, a home warranty which will help fix things that break down. There are warranties that run for one year at a time (they can be renewed each year). This will depend also on the size of the home but a normal first time home buyer home policy will run around $350 to $500. This is not a required expense and can be waived.
Now, you may say that you don't have enough money to pay the down payment and the closing costs! No worries! Have your Realtor write up your purchase contract asking the seller to contribute money toward your closing costs. You can have them pay all of your closing costs so that all you will have to come up with at closing is your down payment!
So now that you understand more about the fees involved with buying a home, I am sure that the inner child has disappeared, you are ready to purchase a home, and once you have accomplished this you will be jumping for joy!
We would love to help you by answering all your questions and helping you find your "perfect" home!
Ron & Brenda Cunningham
WEST USA REALTY
1640 S Stapley #124
Mesa, AZ 85204
*Recognized in the Phoenix Business Journal as One of The Top 50 Realtors in the Valley