THomebuyers need to be prepared for closing costs on home purchase transactions. On all home purchase transactions, there are down payment requirements and closing costs. The down payment on a home purchase is a fixed percentage amount. For example, FHA loans will require a 3.5% down payment on the home purchase price. Fannie Mae and/or Freddie Mac require a 3% down payment for first-time homebuyers on a conventional loan.

Seasoned home buyers require a 5% down payment on conventional loans. A first-time homebuyer is defined as a home buyer who has not had ownership of a home in the past three years. VA and USDA loans do not require a down payment. Lenders offer 100% financing on VA and USDA loans at competitive mortgage rates due to the government guarantee. However, all home purchase and refinance transactions require closing costs.

Any costs that are associated with the purchase and origination of a mortgage are classified as closing costs. Closing costs are not a fixed percentage amount of the purchase price like the down payment. Closing costs vary depending on the county and state in the property is located.

Closing costs are different depending on the type of property and the borrower’s credit profile. Whether a borrower gets government, conventional, or non-QM loans, there are closing costs on any home purchase and refinance mortgage transactions. In this article, we will discuss and cover how to Be Prepared for Closing Costs on home purchase transactions.

Be Prepared for Closing Costs When Qualifying For A Mortgage

Most home buyers want to know how much money do I need to purchase a home. You do not want to use every penny you have saved when buying a home. You would want reserves and some money saved when buying a home. There are costs involved when moving from one place to another. This holds especially true when buying and moving to a new home. It would cost several thousand dollars to move to a new home.

This includes hidden costs such as moving costs, turning on utilities, decorating the new home, and other costs associated with moving and settling in a new home. The down payment is easy to figure out because it is a fixed percentage of the home purchase price. However, closing costs vary on the location of the property as well as the type of property.
Borrowers with less-than-perfect credit will have higher closing costs than borrowers with perfect credit profiles.

This is because of loan level pricing adjustments (LLPAs) on credit scores and other risks lenders will charge such as discount points. The exact amount of closing costs is not determined until more towards the latter stages of the mortgage process when final figures are calculated on the closing disclosure (CD).

However, loan officers will give borrowers an estimated closing cost figure on the initial Loan Estimate (LE). Most homebuyers do not have to pay closing costs out of pocket. Closing costs can be covered with a seller’s concession and/or a lender credit. We will be discussing sellers’ concessions and lender credit in the next paragraph.

What Are Closing Costs On Real Estate Transactions

Closing costs are any costs and/or fees incurred by the borrower besides the down payment. Any costs that are incurred by the borrower in the home purchase and mortgage transaction are classified as closing costs. Closing costs are different and are not a certain percentage like the down payment.

Most closing costs vary between 2% to 8% of the purchase price of the home. Both homebuyers and sellers have closing costs. For example, the real estate agent’s commissions are considered closing costs paid for by the home seller. Certain states like Illinois generally have real estate attorneys representing the homebuyer and home sellers.

The buyer will pay for the buyer’s attorney and the sellers will pay for the seller’s attorney’s fees. These are considered closing costs. The homebuyer pays for any fees and charges incurred due to getting a mortgage. Therefore, cash home buyers have fewer closing costs than homebuyers getting a mortgage. Lenders charge application and origination fees, processing fees, underwriting fees, credit report charges, discount points, and other loan fees that cash buyers do not get charged.

Closing Costs Listed On The Loan Estimate

Most homebuyers only have to worry about the down payment on a home purchase and not closing costs. Closing costs can be covered by a seller’s concession. If the borrower is short of sellers’ concession to cover closing costs, lenders can offer a lender credit to borrowers in lieu of a higher mortgage rate.

The exact amount of closing costs is not known until the latter stages of the mortgage process. However, loan officers will give their borrowers an estimated closing cost figure on the initial Loan Estimate. It is important to understand the line items on the Loan Estimate. The figures on the Loan Estimate are overly disclosed so borrowers should not be freaking out.
There are figures on the Loan Estimate that borrowers do not have to be paid. Loan officers will list these line items in the event if it does occur.

If a loan officer does not disclose a line item as a potential closing cost and the borrower is charged for it, the loan officer and the lender are liable to pay for it.
This holds true even though the loan officer has nothing to do with it and is a third-party charge. For example, if the loan officer does not list a well and septic inspection on the Loan Estimate but a well and septic inspection is required, the loan officer is liable for the cost of the well and septic inspection.

The borrower is not liable to pay for the well and septic inspection fee. This is because the loan officer did not disclose it on the Loan Estimate. Say the loan officer listed the well and septic inspection on the Loan Estimate but the borrower was not required to have the inspection done. The Loan Estimate will come out to be a higher figure than the actual closing costs charged to the borrower. Therefore, the Loan Estimate is normally overly disclosed. The actual closing costs on the Closing Disclosure (CD) are lower than the figure listed on the initial Loan Estimate.

Typical Line Items Listed On The Loan Estimate (LE) As Potential Closing Costs

All lenders need to provide mortgage loan applicants the Loan Estimate (LE) with potential closing costs. Below are potential costs and fees that are listed on the Loan Estimate. Remember that the figures on the Loan Estimate are often over-disclosed to protect the loan officer and lender.

• Mortgage loan origination fees
• Discount points
• Application and credit report fees
• Processing and/or underwriting fees
• Attorney’s fees
• Home appraisal fees
• Home inspection fees
• Flood inspection fees
• Homeowner’s Insurance
• Flood insurance fee
• The yield spread premium for mortgage brokers
• Tax service fee
• Wire transfer fee
• Interest from the day of settlement to the date of the first home mortgage payment
• Private mortgage insurance premium for lender protection
• Property taxes from the day of settlement to the end of the tax year
• Settlement or closing/escrow fee
• Title, transfer stamps if applicable, recording fees and title insurance

Any other fees and costs incurred or that can be potentially incurred by the borrower need to be listed on the initial Loan Estimate. The Real Estate Settlement Procedures Act (RESPA) requires loan officers to send the Loan Estimate with an itemization of potential closing costs within three business days of the borrower getting a mortgage loan application.

Using Sellers Concessions To Pay For Closing Costs

Be Prepared for Closing Costs if you are not going to get a seller’s concession and/or lender credit. Most borrowers at Capital Lending Network, Inc. do not have to worry about paying closing costs out of pocket. They just need to worry about the down payment.

Closing costs can be paid for by the seller’s concession and/or lender credit. Most sellers will offer a seller’s concession to homebuyers so they can pay for closing costs. The maximum seller’s concession depends on the loan program.

Maximum Seller’s Concessions Allowed On Mortgage Loan Programs

Here are the maximum sellers’ concession that is allowed:

• HUD, the parent of FHA, allow up to a 6% sellers’ concession on FHA loans.
• The Veterans Affairs (VA) allow up to a 4% seller’s concession on VA loans.
• USDA Rural Development allow up to a 6% seller’s concession on USDA loans.
• Fannie Mae and Freddie Mac allow up to a 3% seller’s concession on owner-occupant conventional loans.
• Fannie Mae and Freddie Mac allow up to a 2% seller’s concession on investment property conventional loans.

Non-QM loans do allow seller’s concession on non-QM mortgages. However, each non-QM wholesale mortgage lender have their own mortgage guidelines on how much seller’s concession is allowed on non-QM mortgages.