How Much Cash Do You Need?
Your loan officer will carefully go through your financial picture with you to help you figure out what loan program best meets your long-term needs, but we think it will make you more comfortable if you have some sense of how much a mortgage costs and how much cash you will need, as well as when you will need it. Of course, the fees that you will pay will depend on whom you choose as a lender, what kind of loan you get, and the specific house you purchase, but there are some costs that are pretty typical.
“Closing costs” are the costs associated with purchasing a home are listed on the Closing Disclosure and collected at the closing table. Generally, the closing costs come in right around 2-3% (as the price range goes up the percentage of closing costs goes down). In addition, you will need to prepay some expenses including some interest, taxes and homeowner’s insurance totaling approximately another 1% of the sales price.
Because the upfront costs of buying a house are high, and buyers also have to come up with a minimum of 3.5% of the sales price for their down payment, it is not unusual for the buyer to ask the seller to pay some of the buyer’s costs out of the seller’s net proceeds at closing. At the time of the purchase, this “seller’s contribution” is either negotiated as a percentage of the sales price or for a flat dollar amount. In this way the buyers can finance their closing costs rather than bringing the additional cash to the closing table. The buyers generally need to offer a higher price for the house in order to have the sellers be willing to make this concession. For example:
A house is listed for $300,000. The buyer writes an offer for $300,000 but asks the sellers to pay 3% ($9,000) in closing costs on their behalf. This brings the sellers a net of $291,000.
A buyer may also add the costs to the top of the asking price, and this is especially important in a multiple offer situation:
A house is listed for $300,000. The buyer writes an offer for $309,000 and asks the sellers to pay 3% ($9,000) in closing costs on their behalf. This brings the sellers their desired net of $300,000.
The percentage of closing costs that you can ask a seller to pay on your behalf will vary depending upon your loan, and it is important not to ask the sellers to pay costs that exceed the costs that can actually be used. The amount of closing costs that a seller is willing to pay will also vary from seller to seller. In multiple offer situations it may be a significant disadvantage if you need the sellers to help with your closing costs.
Next up: Keep Your Financing On Track