What Are Closing Costs And Fees?
Many first time home buyers don’t have an idea how much closing costs will be when they purchase a home. Closing costs include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed-recording fees and credit report charges. They can vary dramatically by city, county, and state and certain states such as New York, Pennsylvania, Maryland, and Florida have high closing costs due to higher fees for such items such as title insurance, attorney services, and stamp taxes. You must get a closing cost worksheet from your lender after you get pre-approved which itemizes all the costs and the amount you will need for the loan.
The good news is that most first time home buyer programs allow the seller to pay for some or all of the closing costs but you need to get together with your loan officer to determine the closing cost credit you can get from the seller. Other important things to consider are escrows and prepaid home/hazard insurance. Escrows for property taxes and home/hazard insurance are not closing costs but required funds to set up an account for your lender to pay the bills on these items in full when they come due and they are part of your monthly mortgage payment as well. Property tax escrows and home insurance can escalate the amount you will need for closing because some states such as Michigan require at least a year of property taxes to start up an escrow account.
For example, if you purchase a home for $150,000 in Michigan and taxes are $4,000 per year then you may need a minimum of $4,000 to start up your property escrow account which is in addition to your closing costs. Furthermore, a home buyer needs to pay for a year of home or hazard insurance prior to closing on a home and it can be high in some areas such as Louisiana if you purchase a home in flood plain or Florida if you are in a hurricane zone. I have seen flood and hurricane insurance policies for $2,000 or more per year or $167 per month which boosts your mortgage payment. Average home insurance in areas that don’t require coverage for flood, hurricane, tornado, earthquake, etc. is about $600 year so you can see there is a big difference in the insurance premium.
Now, let’s talk about up front out of pocket costs. First of all you will need to put up a good faith deposit with the seller to purchase the home which can range from a couple of hundred dollars to several thousand dollars. Next, you may want to do a home inspection which may cost $200 to $300. Also, the lender will require an appraisal of the home which can range from $350-$500 depending upon the type of appraisal. So, you may need a minimum of couple thousand dollars to get your feet wet in a real estate transaction. I know you may be thinking now that it may cost too much to buy a home but I have dealt with a lot of first time home buyers who didn’t have a lot of funds and I customized a program to fit their budget and financial needs.
For example, I have assisted many first time home buyers in purchasing a home with zero down payment and the seller paid for most or all of the closing costs so they had to bring little to no money to the closing table. Bottom line, you will need to have some money for closing costs and some up-front out of pocket costs and possibly some funds for a small down payment or you may need no down payment if you qualify for the zero down program. If you are still a little short of cash, then sometimes a lender can give you a credit for some of the closing costs but the rate may be a little higher.
At the end of the day, you need to get pre-approved first and go over the costs with your loan officer and work on a strategy to purchase a home with little or no money down which the seller and/or lender pays for most or all of the closing costs to minimize the funds you will need to buy your first home. Contact us today at 847-516-5743 or email firstname.lastname@example.org to get pre-approved and get your closing cost worksheet so you know how much it will cost to buy your first home.