Buying a house is exciting, but it can be a stressful time, too. Concerns like can I really afford the mortgage, do I want the responsibilities of home ownership, or what if I can’t afford closing costs are all common.
Closing costs can be an especially daunting expense when buying or refinancing a home. That’s why it’s crucial to understand the process and to explore how to get money for closing costs if you’re worried about the added expense of buying a home.
Keep reading for a comprehensive overview and tips on how to get closing costs covered.
What Are Closing Costs?
Closing costs are the fees associated with purchasing or refinancing a home – above the purchase price of the home – that must be paid before a loan can officially close. These fees typically include things like:
- Lender charges
- Title insurance
- Appraisal fees
- Taxes
- Other miscellaneous expenses related to funding the transaction
The total amount of fees you pay to close on your new home can vary. Your final closing cost amount will depend on a number of factors, including how much you pay for the home, the location you’re in, and the type of loan you’re getting.
Generally, though, you should expect to pay in the range of 2-5% of the total loan amount.
Lender Fees
Lender fees are the fees charged by banks or credit unions for processing loan applications and providing funds to purchase a home. These fees typically include origination points, appraisal fees, underwriting fees, and document preparation fees, among other things.
The exact amount you spend on lender fees will depend on the lender’s policy and any discounts they might be offering.
Property Fees
Property-related closing costs may apply if special assessments are made against the property prior to the sale or transfer of ownership rights. For example, prorated taxes can be due at the closing.
Other common examples of property fees can include homeowners association (HOA) dues, which are often collected upfront during the escrow period, or outstanding utility bills that may need to be settled before finalizing the transaction.
Calculating Your Closing Costs
Your lender will give you a Loan Estimate with projected closing costs and other details, typically within three business days after you apply for a home loan.
Before you close escrow, you’ll also receive what’s known as a Closing Disclosure. This document details the final breakdown of your closing costs. Make sure you read the Closing Disclosure – and all other loan documents – carefully and ask questions if you don’t understand anything.
Ways to Pay Closing Costs
Fortunately, there are several creative options if you’re wondering how to pay closing costs without adding even more stress to the home-buying process. Fully understanding each tactic can help you determine which might work best for your situation.
Roll Into Your Mortgage
Many people buying their home wonder can you include closing costs in the mortgage? In short, yes. Rolling closing costs into the mortgage means increasing the principal balance of your loan to pay off those extra expenses.
Financing closing costs lets borrowers avoid having to shell out a large sum of cash up front. But keep in mind this way of covering closing costs essentially adds more debt and can substantially increase the overall interest you pay over the life of your loan. And it will almost always result in higher monthly payments, since now you have a larger balance to pay off.
Ask Your Lender
Another option is to request your lender waive certain fees. For example, you may be able to reduce the origination point or lower the processing charge. Bottom line, it’s worth talking to your bank to see what options are available – every bit counts when you’re trying to save money on a huge purchase like a home.
Ask the Seller
If the market is competitive, sellers may be willing to chip in on the buyer’s side to move the deal. There’s no guarantee that they’ll agree, but it’s always worth asking. Especially if the sellers are making a sizable profit, they may be willing to split the difference to ensure the deal goes through.
Government Assistance
In some places, assistance programs can help low-moderate income families afford the dream of owning their own homes. For example, California has the CalHFA program available to qualified low-income buyers. The program provides grants and loans to eligible borrowers, and the money can either directly subsidize part of a down payment, or cover the entire thing, depending on certain factors.
Use a gift
Using gift money as a source of funds to cover closing costs is often an overlooked option. Yet, it’s a great way to quickly and easily finance some of the purchase price without worrying about repayment terms or obligations attached.
Gifts are accepted as a form of payment in many cases, although rules and regulations vary significantly from state to state. Consult with a professional to verify the legality of your specific circumstances before proceeding.
Personal Loan for Closing Costs
Can you get a loan for closing costs? A personal loan strictly to cover closing costs can be a viable solution if you’re struggling with how to pay. Of course, whether this option makes sense depends on your financial situation. Make sure to crunch the numbers and decide wisely. Taking out debt to cover debt can be risky if you’re not in the right position.
Final Thoughts
If you’re looking for additional guidance regarding how to pay closing costs, consider talking to a loan officer at HFS Federal Credit Union. We have decades of experience helping customers find solutions tailored to their needs.
Whether you need advice about financing options, or you want someone who understands the local market better than anyone else, we’re here for you every step of the way. Visit us today and get started on your journey toward homeownership.
Reach out to the HFS Federal Credit Union team today for more information and assistance getting started on your journey towards becoming a proud homeowner as soon as possible.
