Most loans today require some amount of a down payment. But they all require closing costs. There are lender fees, common ones are loan processing and underwriting fees, and there are non-lender fees. Non-lender fees include items such as an attorney fee or title insurance premiums. It’s the non-lender fees that can really add up as mortgage loans require services and documentation from multiple players in the real estate world.
Saving up for a down payment is probably the biggest challenge, especially for first time home buyers, but closing costs also need to be addressed. Here are three ways buyers can reduce or eliminate these costs.
The first way is to have your lender quote you an interest rate that provides a lender credit toward your closing costs. When your lender quotes rates and fees to you, you’ll get a range of rates from lower to higher. Lower rates will require upfront interest in the form of a discount point. One discount point equals one percent of the amount borrowed. On a $300,000 loan, one point is then $3,000.
For example, if your lender offers 4.25% with no points on a 30 year loan you might also be able to get a 4.00% by paying one point upfront. The lender really doesn’t care if you pay points or not, it’s completely your call. You have the option of paying interest upfront in the form of a point or you can pay the interest over the term of the loan without paying a point.
If you take that 4.25% rate one step further, say to 4.50%, the lender may offer a one point credit. Your monthly payment goes up by a little, but you also saved on closing costs. On that same $300,000 30 year loan, the 4.50% rate gave you a $3,000 credit at the settlement table. There is some math involved to determine which rate is best in your situation and your loan officer will walk you through the process.
Another way to reduce your closing costs is to have the sellers pay them for you. This involves you and your real estate agent making an offer that asks the sellers to pay for all or some of your fees. Your offer might include verbiage that asks the sellers to pay a certain percentage of the sales price, say 1% or 2% of the sales price or you might ask for a specific amount, such as $3,000.
Different loan programs place certain limits on how much the sellers can pay so you’ll need to check with your loan officer before making the offer. Most such limits are rarely reached however. The maximum seller contribution for a VA loan for example is 4.0% of the sales price. Taking a $300,000 sales price would then provide up to $12,000. Closing costs are nowhere near that.
Finally, if the sellers decide to decline your request, you can adjust the sales price upward. If the sales price is $300,000 and closing costs are $3,000, you can offer $303,000 while then asking the sellers to pay $3,000 of your costs. The sellers net the same amount at the closing table and you don’t have to come up with an additional $3,000 for closing costs. One potential issue with this method is making sure the property will appraise at the higher amount, but a one percent increase usually won’t cause any problems. And yes, when making a higher offer that also means your loan amount will also go up the difference in monthly payment is barely noticeable.
Closing costs will need to be addressed just as a down payment needs to be. Your loan officer will provide you with an initial cost estimate that will generally match up with your final settlement, so you’ll know what to expect. You can adjust your rate upward, have the sellers pay for them as part of your offer, or increase your offer slightly to include an amount reflecting your expected settlement fees.