Most homebuyers will have a down-payment ranging from a minimum of 3.50% to 5% or more. That always has to come from you either from funds you already have, proceeds of a home you are selling, or by way of a gift from a linear family member (parent, grandparent, sibling, aunts and uncles).
There’s more money that you will need to complete your transaction, though. One component is called “Closing Costs” and that category covers the actual expenses in connection with getting the loan. This includes items such as:
- Underwriting or Bank fee
- Appraisal (an independent valuation of the property you are buying)
- Credit report
- Flood Certification (a report that identifies whether the property is located in a flood zone)
- Tax Service fee (a report that verifies the real estate taxes)
- Closing or Settlement charge (the attorney’s fee for representing you and the bank)
- Title Search (a detailed examination of the ownership history and related events)
- Title Insurance (required by all lenders to protect against any claims against title)
- Recording fees (charges for recording the title and mortgage documents in the land records)
- Miscellaneous (fees for a variety of transaction-related services such as wire and courier fees)
Another component is called “Pre-paids” and this category covers funds that will either be used to reimburse the seller, used to fund the escrow account (an “escrow account” is a fancy term for a savings account managed by a 3rd party to collect and pay expenses on your behalf), or pre-pay interest expenses up to the 1st of the month following your closing. Here’s a summary of what to expect:
- You’ll likely need at least 8-months of taxes. That’s because most towns in Connecticut and Massachusetts collect taxes 2 times a year. Those payments are made in advance meaning that the payment made on July 1st covers the period from July 1st thru December 31st and then again on January 1st for the period covering January 1st thru June 30.When you close, some of the 8-months of taxes that gets collected from you will go to the seller for taxes they paid beyond your closing date (since it’s not their property any longer, they’ll want to be reimbursed). The balance of the taxes collected will go into the escrow account so that there’s enough in the account on the next due date to pay the next installment.
- You will need to pay your 1st years’ homeowners insurance prior to closing so that there’s coverage in place when you close. Each month, the bank will collect 1/12th of your annual premium and put it in your escrow account so that they can use that money to renew your policy on the next anniversary. You’ll also need to seed the escrow account with 3-months of insurance premiums to ensure that there’s enough in the account upon renewal.
- It’s worth pointing out that the lender is required to keep a buffer equal to 2-months of taxes and insurance so ensure that as costs rise – and they will – they can use the funds in the buffer to pay the applicable charges.
- Last, you’ll pay the per day interest costs on your new loan from the date of closing up to and including the 1st of the next month. A couple of important comments about this:
- It is customary to use a default of 15-days of pre-paid interest when estimating your costs on the Loan Estimate. Please know that you’ll only pay for the actual number of days involved.
- Mortgage interest is charged in arrears. That means that your mortgage payment due, for example, on July 1st is for the use of the money in the month of June.
Another block of funds you’ll need to account for are for inspections (home inspection, pest, radon, water, well, and septic) and these costs are expended at the beginning of the process. Depending upon the type of property you are buying, whether the property has public or private water and sanitary systems, and your decisions about conducting other types of optional tests, you should anticipate spending from $500 – $1,500.
The last item you should anticipate if the home is heated with oil or propane is a credit to the seller for the amount of fuel being transferred at closing. Often times, to avoid any questions about how full the tank is, you’ll find that the seller will have the tank filled just prior to closing and you’ll pay the going rate for a full tank.
A final comment: when you are seeking seller-concessions, make sure you don’t over-shoot the amount needed. That’s because any funds that don’t get applied to your closing costs and pre-paids cannot be refunded to you and that means, essentially, that you’ve over-paid for your home by the amount you weren’t able to use. When you are preparing an offer, a simple method for calculating the maximum you can ask for is
- Take the total of the inspections, closing costs, pre-paids, and adjustment for the heating fuel
- Subtract the costs of the inspections, appraisal, and homeowners from this total (these need to be paid for prior to closing and, thus, won’t be paid for by a seller)
- The balance is the maximum you should ask for although I typically recommend that you shave $500 off of that number to ensure you don’t leave any funds on the table.
Here’s a chart showing how much, as a percentage of the purchase price, you are able to roll in to your deal:
|>90% LTV = 3%
75% – 90% LTV = 6%
<75% LTV = 9%