Buying a house is exciting whether you’re a first-time buyer or you’re buying your third home. Even so, there is no getting around the fact that buying a house is expensive. You have to save money for the down payment. You need to be ready to make the mortgage payments, and then they throw expensive closing costs at you before the house becomes yours. So, you might be wondering how to afford closing costs. There are ways to make them much more affordable. Here are some of the best.
How to Afford Closing Costs
You’ve got your down payment saved and you know how much house you can afford, but before you even start looking, be sure you are ready to handle closing costs.
On average, you can expect to pay 3 to 4 percent of the cost of your new home in closing costs.
That means for a $300,000 dollar home your closing costs will be between $9,000 and $12,000 dollars.
That’s a lot of money.
No fear, you can use one of these methods to make your closing costs more affordable.
1. Close on the last day of the month
If you close on the last business day of the month, you will have to pay less per diem interest.
This can save a decent amount of money.
If you are closing at the beginning of the month, you will have to pay per diem interest for every day left in the month.
So, make sure your closing is as close to the end of the month as possible.
It is an easy way to save money on closing costs.
2. Check Into a Closing Cost Assistance Grant
Check into local or even state housing commissions. These agencies have money set aside specifically to pay the closing costs for low and moderate-income borrowers.
The agency needs to be HUD-approved.
This type of grant is actually considered a gift. You will need to live in your new house for a specific number of years otherwise you might have to pay back the money.
You also can’t refinance your home during this period of time.
These funds are limited and the application process can be lengthy, so apply as soon as you find your new home and your offer has been excepted.
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3. Ask the Seller to Pay the Closing Costs
This works best in a buyer’s market. If the real estate market in your area is really hot and sellers have multiple offers to select from, there is a good chance they won’t agree to pay part or all of the closing costs.
But if the house has been on the market for a while, then the seller might be willing to offset some of the closing costs.
This will need to be agreed upon when you sign the contract.
The seller can pay up to 6 percent of the sale price. This is called a closing-cost credit.
Also, this is a tax deduction for the seller.
You can also offer to pay the full asking price in return for this closing cost credit from the seller.
If the seller is truly motivated to sell, this might be a win-win situation for both of you and a great way to make closing costs affordable.
4. Make a Smaller Down Payment
Depending on your credit score and specific situation, your lender may allow you to have a smaller down payment which will free up some of your funds that can then be used for your closing costs.
This doesn’t reduce your closing costs but it does make it easier to cover them.
Just a couple of warnings here.
This will mean that your mortgage amount will be larger and in turn, your monthly mortgage payments will be larger because your downpayment will be smaller.
Also, if your downpayment is under 20 percent then there is a good chance your lender will require you to purchase mortgage insurance.
These premiums will be added to your mortgage payments.
So, over time, you will end up paying quite a bit more for your home.
5. See if Your Lender Has a Loyalty or Grant Program
You might be surprised to hear it, but there are banks that have loyalty programs that will assist you with your closing costs to reward you for being a customer.
This assistance often comes in the form of reduced origination fees.
Considering origination fees can be quite high, this is a great saving.
Not all banks or lenders offer these types of programs, so before you apply for a loan, ask the loan officer if this is a possibility.
If they say no, you might want to shop around to find a lender that does. It could save you hundreds or thousands of dollars.
Another option is to ask your lender if they have a grant program.
In this case, the money offered would be a grant and considered a gift, so it would not have to be paid it back regardless of how long you own your house or have the mortgage.
These grant funds are specifically for closing costs and can’t be used for your downpayment.
The grant can be for part of your closing costs or all of them which is great.
The policy change that made it possible for banks to offer these types of grants went into effect in 2018, so not all banks have these programs or are aware of them.
You will just need to ask.
6. Add Your Closing Costs into Your Mortgage
There are some pros and cons to this option.
The big pro is that you won’t have to come up with even more money to pay your closing costs as they will be part of the loan.
The downside is that you will be looking at a higher interest rate, and that means larger monthly mortgage payments.
However, if you don’t have the money for your closing costs this is one way to handle it.
You will want to ask for a no closing cost mortgage.
You just need to ask yourself if makes more sense for you to wait a while longer to save up money for closing costs or if buying a house sooner and having higher monthly payments makes more sense for you.
7. Check Out FHA Loans
If you have a lower income you can apply for a Federal Housing Administration loan.
This type of loan is backed by the government.
When you apply for this type of loan, you may be able to get some assistance for your closing costs through a third party such as one of the following.
- Mortgage brokers
- Real estate agents
These third-party players can provide you up to 6 percent of the loan amount.
Not to mention if your credit score isn’t great, FHA loans will approve mortgages for those with lower credit scores as compared to a typical lender or bank and as low as 580.
8. Ask for a Cash Gift From a Friend or Family Member
If you are lucky enough to have a friend or family member with lots of cash and who is willing to give you money to cover your closing costs this is a great option.
There are a couple of rules you need to be aware of, however.
One, it has to be an actual gift.
This can’t be a loan.
There should be no expectation on the part of the person giving you the money that you will ever return it.
Two, the source of the funds may need to be verified.
That means the person giving you the money might have to show the lender proof of where the money came from.
This can be done with a bank statement or investment account statement.
9. Check Out Your Military Benefits
If you are or were a member of the Armed Services, you might have access to closing cost benefits.
Also, for some of these benefits, you are not required to get a VA loan. They can be used with other types of loans which is great as that gives you more options to find a mortgage.
You can find out more at usmhaf.org.
10. Are you a Union Member?
If you belong to a union such as the AFL-CIO you might have access to benefits that will help you purchase a home such as closing cost benefits and rebates.
If you’re not a member, depending on your job, it might make sense to join a union so you can take advantage of these membership benefits.
11. Check Out Your Employee Benefits
Depending on where you work, your company may offer homebuyer assistance programs.
These benefits usually come with some requirements such as working for your company for a number of years after you receive them.
If you work for a small mom and pop place, chances are they won’t offer anything like this, but if you work for a big corporation, they might.
It’s worth a few minutes to check.
What are Closing Costs on a $300K Home?
You’re looking at anywhere from 2 percent to 4 percent of your home’s cost for closing costs.
They can be higher or lower depending on the lender and what part of the country you live in.
So you should expect the closing costs on a $300K home to be between $6,000 and $12,000 dollars.
What do You Have to Pay for Closing Costs?
There are many different types of fees you have to pay at closing,
Some of the more common include:
- Property transfer taxes,
- Inspection fees
- Appraisal fees
- Title fees
- Title searches
- Deed transfer fees
How Much Should I Budget for Closing Costs?
You should budget 3 to 4 percent of the purchase price for closing costs.
So, once you decide on a price range for the new house you want to buy, take that amount times 3 or 4 percent and you will have your amount.
For example, if you plan to buy a $150,000 dollar home you would want to set aside $4,500 to $6,000 dollars for closing costs.
What Happens if You Can’t Afford Closing Costs?
If you can’t afford closing costs you can apply for a closing cost assistance grant from a HUD-approved local or state commission or agency.
These organizations have money set aside to help moderate and low-income buyers pay for closing costs.
How Much are Closing Costs on a $200,000 House?
You can expect to pay between $4,000 dollars to $8,000 dollars on the high end, for closing costs on a $200,000 dollar home.
It will depend on where you live, who you get your mortgage from, and the type of loan you receive.
Do Closing Costs Include Realtor Fees?
Yes, closing costs do include realtor fees.
In this case, the seller will typically pay these closing costs.
These realtor fees are due at the closing and can’t be put off.
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To Sum it All Up:
Closing costs are a major expense. You can expect to pay between 3 and 4 percent of the purchase price of your home in closing costs, but there are ways to make them more affordable. You can apply for a grant, add them to your loan amount, or even ask the seller to pay them.