FINANCING AND CLOSING COSTS WHEN BUYING A PROPERTY
As you know, purchasing a property is a big financial commitment. Before starting with the whole homeownership process, it is crucial to understand that there will be additional costs to the homeâ€™s price. You will have to pay some one-time upfront costs including your down payment and several closing fees. These fees will be greater when you finance your purchase as your lender and third parties will represent additional charges that are to be paid once you close on your mortgage.
Depending on your lender and the type of loan that you are going for, you will be required to put a percentage of the selling price as a down payment in order to qualify for the program. If possible, starting with a larger down payment will be much better for several reasons: You may be eligible for a better interest rate, you will end up paying less in interest, you will have lower monthly payments, and you will avoid paying Private Mortgage Insurance (PMI). PMI is required by lenders when you put less than 20% down, and is charged until you have roughly 20 percent in equity (meaning you have paid 20% towards the principal, not including interest). PMI will be included in your monthly payment amount.
Besides the Down Payment, homebuyers will typically pay between 2% and 4% of the propertyâ€™s purchase price in closing costs. Below is a list of common Closing Costs:
- Credit Report fee.
- Loan Origination fee charged by the lender for processing the loan paperwork for you.
- Attorneyâ€™s fees.
- Home & Pest Inspection charges required/requested by you or the lender.
- Loan Discount Points, which are fees you may choose or be required to pay in exchange for a lower interest rate. A Discount Point is equal to 1% of your loan amount.
- Appraisal fee, required by the lender to make sure that the property is worth what the buyer is paying for it.
- Survey fee, for the purpose of verifying property limits.
- Title Insurance, which protects the lender in case the title isnâ€™t clean. (If thereâ€™s a lien or claim on the home).
- Title Search fees, cover a background check on the title to verify that there are no unpaid mortgages or tax liens on the property.
- Recording fee, paid to the city/county Government for recording the new land records (Deed & Mortgage).
- Underwriting fee, for the loanâ€™s application evaluation.
- Overnight Delivery charges, by Title Company to overnight closing packages or payoffs.
- Escrow Items, money that could be used to pay for property taxes and insurance if the borrower is late on payments or defaults on the loan.
Note that, within 3 days of applying for a loan, lenders are required by law to give you a Good Faith Estimate (GFE) of the closing costs. Remember this is just an estimate, and many of the fees listed on the GFE can legally change by up to 10%. Finally, a day or two before closing, your lender or closing company should send you a HUD-1 Settlement Statement itemizing all the closing costs.
Adrian Morales Dobrzynski