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.