If you are looking to buy a house the first step you need to take is to get pre-qualified. During that process your mortgage broker or lender will ask you for credit, income and asset documentation. There are many variables involved for each individual borrower but there is one constant. That is that you will need assets to cover the down payment, closing costs, property taxes and insurance. How much depends on the specific purchase price and your overall credit profile. It is also not enough to simply have these funds available. For most conventional programs this money will need to be in an existing account for at least 60 days. Before you begin shopping around for a mortgage you should have a rough idea on how much you will need to close.
Your down payment is not a closing cost. This will be the majority of the funds you need for closing but it is not technically a closing cost. The down payment amount can be as low as 3% and as high as you want it to be. The stronger your credit score the less money you have to put down. It is important to know that anytime you put down less than 20% of the purchase price you will be subject to private mortgage insurance (PMI). This amount will be added to your monthly payment until you reach 20% equity. At that time you can get an appraisal on the property and have that removed.
The next biggest chunk needed for closing will be your prepaid property taxes and insurance. Most lenders require you to escrow, or include the taxes in your monthly payment. To do this your lender needs to establish an escrow account. They will hold anywhere from three to nine months of taxes in this account and pay your taxes for you when they are due. They will also need to see one year paid homeowners insurance. Both the prepaid tax amount and the homeowners insurance is often an overlooked item when considering how much money is needed to close.
The true closing costs fall with your loan origination, attorney and lender fees. Here is where you can shop around to get the best deal for you. You have every right to get the best possible deal but know that if your credit is pulled by too many companies it can cause your score to drop. Most lenders will give you the option of paying points to get the lowest possible rate or taking a higher rate with no origination fee to the lender. The higher the loan amount the more important the interest rate is. In today’s lending market most lenders are very competitive and will be within a half point of each other. If you want to compare apples to apples ask your lender to provide you with a good faith estimate. These will breakdown all the costs and itemize who they are going to. You can also shop around attorneys and ask what their fees are including the title search and title insurance. As is the case with your lender the attorney fees will usually be fairly close to each other.
There will be closing costs on every deal. Some or all of them can be picked up by a seller credit but the funds must be in an existing account for at least 60 days. You also need to have funds available for the appraisal and the inspection before the closing. Knowing which costs go where can be confusing and at times overwhelming. The best thing to do is ask your lender for an estimate before you get started and have your money in an account as soon as possible.