By Sean P. Aguirre

August 19, 2018

So you’re ready to buy your first home and you’ve saved up the 3% you need for your down payment – great! You get into escrow and you receive your Loan Estimate from the bank only to find out you’re thousands of dollars short on your funds to close the loan – what happened?

When purchasing a home, be sure you know what to expect for closing costs. These are the costs to obtain a home loan and can be split into three basic categories:

1) Lender Costs – these are the fees charged by the bank and usually comprised of processing and underwriting fees. They are the ONLY fees you’ll know before you get into escrow, as the bank can only charge fees related to the bank. A good estimate of lender costs is $1,200 – $2,000.

2) Third Party Costs – assessments charged by everyone other than the bank – escrow, title, the appraiser etc. Generally the Realtor that is selling any given property is the person that decides which third party companies will be used. For that reason, a buyer isn’t going to know what these costs are until they’re in contract. A good estimate of third party costs is 1% – 1.5% of the price of the home

3) Pre-Paid Costs – these are the costs to set up your impound account, which is the fund that pays your property tax and home insurance bills on your behalf. In order to close the loan, the lender has to collect monies for future property tax and home insurance bills, so when those bills become due, your impound account will have enough to cover it. If you put 10% down or more, you can choose to omit the impound account and pay your bills on your own, then these costs would not exist. A good estimate of pre-paid costs is 1.5% – 2% of the price of the home

If you want to avoid paying closing costs, here are 2 options:

Lender Credit – the bank can pay for some/all of the closing costs, at the exchange of a higher interest rate
Seller Credit – when we make offers, your Realtor can negotiate to have the seller pay for some/all of the closing costs from the profit of their home sale. This option is not always a good idea, as the seller may not accept an offer from a buyer requesting credit

Bottom line – be prepared and work with a lender that can give you all your options so you can make the best decision for you!

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