You're almost there! You’ve set a budget for your monthly mortgage payment and saved up a down payment—but there’s one more thing you need to consider: the closing costs for your home.
Your closing costs need to be paid when you sit down to sign the paperwork for your mortgage, but thankfully, you can draw from different sources to come up with the money. Let’s take a closer look at what’s involved and compare a few different sources so you’ll be prepared when the big day comes.
What are closing costs?
These costs typically include insurance, property taxes, and the professional fees for all the people who help with the purchase and paperwork of your home. Here's what you're paying for:
- The first year of homeowner’s insurance, title insurance, and private mortgage insurance (PMI) if your down payment is less than 20% of the purchase price.
- Your first property tax bill, which usually covers the first six months that you’ll be in the home.
- Fees for the appraisers, surveyors, and loan processors who worked on your mortgage.
- If you've opted to pay points in exchange for a lower interest rate, those costs will be collected at this time.
How much will your closing costs be?
On average, you should budget between 2% to 5% of the cost of your loan. For example, if you’re applying for a $100,000 mortgage, you can expect to pay $2,000 to $5,000 at closing. In most cases, you can find the exact amount of your closing costs in the Loan Estimate that your lender sends you after you submit a loan application.
How do you pay closing costs?
The good news is you have lots of options—and it doesn’t all have to come out of your pocket. Let’s look at some of the ways you can cover closing costs.
- Pay from your personal checking or savings account.
If you have sufficient funds in your personal accounts after making your down payment, you can use it to pay your closing costs (Just be sure you still have enough in the bank to cover the rest of your monthly bills). For legal reasons, the money must be in your personal banking account for at least 60 days before you accept your offer. Lenders require two months of bank statements to show that you’ve saved this money—a process known as “seasoning” your funds.
If you’re self-employed, you can also transfer money from your business account directly to escrow. The money can also be transferred from your business to your personal accounts, but you may need to “season” it for 60 days before closing. Be sure to talk with your loan officer beforehand to see what extra documentation may be needed.
- Roll it into your mortgage.
Another method is to add the closing costs to your mortgage loan. You'll need to talk to your loan officer to see if your loan type qualifies for this option, but it can be a budget-friendly choice for many people, especially if you're buying your first home. Just be aware that you'll pay interest on this amount over the years and end up paying more than if you paid your closing costs up front. Still, if you're short on cash, it can be a great way to get into your new home.
- Ask for a seller credit.
With conventional, FHA, VA, and USDA loans, you can ask a seller to cover part or all the closing costs, using part of the money they earn from the sale of their house. Just keep in mind this method works best in a buyer’s market where the seller is not receiving multiple offers. In a seller's market, the seller is not likely to make concessions and will most likely choose another offer.
You can make a seller credit more attractive by offering the seller a higher purchase price at the same time. For example, if your closing costs are 2 percent of the home price and you offer to pay the seller 2 percent more, they may agree to your terms. Just remember - increasing the size of your mortgage can add to the lifetime cost of your loan.
- Ask your family for gift funds.
Did you know that parents, other relatives, or significant others can contribute to your closing costs? For legal purposes, they need to document their donation in a Gift Letter stating their name, the amount of the gift, and the fact that they do not expect you to pay it back. (Here at Amerifirst, we can give you a form that your family can complete.) It’s ideal to have the givers send money directly to your escrow account so you don’t have to provide additional documentation. Your loan officer can explain the process in detail.
Read our blog: Using gift funds for your down payment
- Apply for government assistance programs.
Local and state housing commissions often have special programs for first-time home buyers, especially low- or moderate-income buyers or those buying in certain hard-hit regions. These programs provide a variety of grants (which never have to be repaid), forgivable loans (which do not have to be repaid if you stay in the home for a specified time), or low-interest loans that can be used for down payments and/or closing costs. Learn more about the programs in your area.
Even More Resources to Consider
If you’re still adding up your dollars, there are three other sources that may be able to help:
- Employer assistance programs at your job
Some workplaces offer programs to help their employees cover down payments and closing costs on their homes. Check with your employer to see if they offer this perk and then check with your lender to make sure these contributions are acceptable. If so, ask your loan officer what kind of documentation you need to use these funds.
- Secured loans
Do you own other property or high-value items like a car or a boat? If you are no longer making payments on these items but own them outright, you may be able to use them as collateral for a secured loan that will cover your closing costs. Ask your lender for more details.
- Personal property sales
Selling items like jewelry, recreational toys, or collectibles is another way to earn money for your closing costs. Note that you should make the sale at least 60 days before closing so you can “season” the funds, and you should keep detailed receipts showing the sale of the item and the date and amount of your deposit into your bank account.
As you can see, there are many ways to fund your closing costs, if you know where to look! Just keep in mind that lending rules vary depending on where you want to buy and what type of loan you are seeking. If you have any questions, ask your loan officer for advice before you start gathering funds. Then when you're ready to move ahead, reach out! We’re eager to help you get into your next home.
If you're' buying your first home, we know you've got lots of questions. That's why we've put together a free step-by-step guide to help you get started on your homebuying journey. Download "The Get Mortgage Ready Guide" at the button below.