Like many people with a home purchase on their horizon, you probably feel a combination of happiness and apprehension. It’s natural to be happy when contemplating buying your next home. Still, it’s also understandable to be nervous, especially if you’re worried about potential obstacles such as not being able to afford closing costs. Considering that the average closing costs are between three and six percent of the total loan amount, it should be no surprise that you aren’t alone in wondering whether you can afford them — about a third of potential new home buyers share this concern. Fortunately, strategies exist to help those in this position realize their dream. Here’s what you need to know:
What Are Closing Costs?
Closing costs refer to fees and assorted charges associated with selling a property. These may include title search costs, prorated property taxes, appraisal, recording, and application fees. Be sure to ask your real estate agent for the specifics — various closing cost responsibilities may differ depending on individual state statutes.
Many first-time homeowners underestimate the closing costs they’ll be asked to pay. There is good news, however. Because closing costs are paid directly to the lender, financial institutions often have the discretion to provide buyers with breathing room when it comes to paying them.
How to Lower or Eliminate Closing Costs
One of the most common ways to eliminate being hit with a lump sum for closing costs is to roll them into the mortgage. Although this will raise the overall loan amount, many home buyers find it a more manageable approach than having to come up with the entire amount at one time, especially if they’ve had to come up with a sizable down payment. The way this typically works is that the lender increases the amount of the loan principal to cover the closing costs or raises the interest rate to correspond to cover the expenses. Either way, spreading the amount over a long way of time is more palatable to many people.
For the first scenario to work, the home must be appraised for the slightly higher amount necessary to roll the closing costs into the loan.
Apply for Government Programs
Programs exist at the local, state, and federal levels to assist prospective homeowners with down payments and closing costs. These programs typically operate under the U.S. Department of Housing and Urban Development umbrella and are administered by local and state housing agencies. Most are structured as grants, meaning buyers aren’t required to pay them back if they remain in the home for a predetermined number of years — usually five, but it can vary per individual program.
Negotiate With the Seller
Sellers sometimes have reasons for wanting a quick, seamless sale — perhaps they’ve got a great new job offer in another city, or maybe they’ve just purchased a retirement home in the location of their dreams — whatever the reason, sellers will sometimes agree to pick up at least part of the buyer’s closing costs to facilitate a sale.
Talk With Your Real Estate Agent
With offices in 32 U.S. states, your agent with the Potempa Team is your best local resource for purchasing a property your way. Please reach out to us today for more information on getting started on your next home purchase.