First-time homebuyers are often shocked when they discover that the list price isn’t exactly what a new home will end up costing.
Securing a home loan comes at a price beyond the loan amount. That price comes in the form of closing costs, which are fees and charges you pay in order to obtain a purchase or refinance loan.
But what exactly are closing costs and how will they affect your purchase?
There are a host of types, including fees to the lender, a title company, an appraiser, a pest inspector and others.
But borrowers also have to worry about prepaid costs, which are up-front payments for things like homeowners insurance, property taxes and homeowner association dues. Together, closing costs and prepaid costs can add up to more than 5 percent of the loan amount.
Your closing costs can vary from your neighbor's depending on a number of factors, but these often include things like:
Closing costs cannot be financed into your loan. They have to be covered at the closing table.
Now it’s time for a deep breath and some good news: Veterans typically pay only a fraction of those costs. This is one of the most dynamic aspects of a VA loan. Sellers can pay most or all of the buyer’s closing costs and prepaid items.
But just as the VA caps what a veteran can pay in closing costs, so, too, does the agency cap what a seller can pay for a borrower. Sellers can pay no more than 6 percent of the loan value in closing costs and concessions. The positive side is that this 6 percent limit is generally more than enough to cover the fees.
You may be asking yourself why anyone would want to pay thousands of dollars in closing costs when they aren’t obligated to and the simple answer is because they want to sell their home. Current conditions truly make for a buyers' market so don’t be afraid to ask the seller to cover these costs.
If the seller is unwilling to cover your fees but you don’t have the cash on hand, consider increasing your offer by the cost of closing costs so the seller can cover it automatically, provided that works with your preapproval amount and ultimately the home appraisal.
Hopefully this rundown helps demystify closing costs and explains some of the different options you have for covering them without breaking your budget.
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