Tuesday, April 14, 2009

Buyer Guide to Closing Costs

Caller: "How much money do I need to buy a house now?"
Me: "Well, 3.5% is a good rule of thumb, but it's not the whole story."

First time buyers are out in the market in force lately and I get a phone call like the one above a couple times a week. Home prices are getting too good to pass up and mortgage interest rates are shockingly low. FHA loans are reasonably easy to get, require only 3.5% cash down, and are not credit based which means that if you have little or no credit rating you’re still going to be seriously considered for a mortgage.

One thing many first time buyers aren’t prepared for is the concept of closing costs. Here’s a rundown of closing costs commonly paid for by buyers:

  • Title insurance premiums

  • Escrow fee

  • Notary fee(s) if any

  • Recording fees for all documents in buyers’ name(s)

  • Home inspections (per contract)

  • Termite inspections (per contract)

  • Tax proration (from the date of acquisition)

  • 2-4 months of property taxes are pre-paid

  • Homeowner’s transfer fee (a.k.a. transfer tax, currently not applicable in Arizona)

  • All new loan charges (except those required by lender for seller to pay)

  • Interest on new loan from date of funding to 30 days prior to first payment

  • Fire insurance premium for first year; other hazard insurance premium(s) for first year

  • Prepaid mortgage insurance premium (currently 1.75% of purchase price)

That’s quite a list! How much does it all add up to? For the FHA buyers I’ve worked with lately, these have added up to about 3% to 5% of the purchase price.

So if you’re buying a $100,000 house, expect closing costs to run about $3,000 to $5,000. That’s money you need in addition to the 3.5% cash down payment, which in this case would be $3,500.

FHA buyer? $100,000 home? You’re going to need about $6,500 to $8,500 in cash, in the bank, in order to purchase.

Holy bank book balance, Batman! That’s a mess o’ moola!

Don’t fret. The current market dynamics allow buyers to ask for – and get – sellers to pay buyers’ closing costs. It’s called a “seller concession” and we’re seeing these frequently.

Tune in next time to find out how requesting seller concessions works. Can’t wait? Check out how FHA buyers can get repairs done on “As Is” bank-owned homes.