Closing costs are subject to negotiation

STARTING OUT

June 05, 1994|By Dian Hymer

How much cash will I need for closing costs?

When you buy a house, you need enough cash for the down payment and closing costs. The various fees associated with a home purchase are called closing costs.

Both buyers and sellers pay closing costs. Who pays which costs is often dictated by local custom, but it can be subject to negotiation.

Buyers can usually expect to pay the fees associated with getting a home loan; title insurance (depending on the location); transfer taxes, if there are any (although the seller may pay these or they may be shared 50-50); inspection fees; property mortgage insurance (called PMI to protect the lender in case of a buyer default); and hazard insurance. The amount of your closing costs will vary depending on local custom and what kind of loan you get, but they can be as high as 5 percent of the purchase price.

To qualify for a home loan, you must show the lender that you have enough cash for the down payment and closing costs. In addition, many lenders require that you have enough cash reserves to cover a few months of house payments. Borrowing money at the last minute to cover your cash requirements may not work because lenders usually want you to show that you've had the cash you need in your own bank account for several months.

There are ways to reduce the amount of your closing costs. The loan origination fee, also called "points," is usually the most expensive buyer closing cost.

One point is equal to 1 percent of the loan amount. A no-point loan will have a higher interest rate, but the closing cost savings is significant.

Another way to reduce the amount of your closing costs is to close your home purchase late in the month. At closing, the lender will collect enough money from you to cover the interest you owe for that month. The later in the month you close, the less interest you owe.

FIRST-TIME TIP: Most lenders will allow the seller to credit the buyer an amount of money at closing to cover some or all of the buyer's nonrecurring closing costs.

Nonrecurring closing costs are paid by the buyer once. These fees include such things as points, transfer taxes and title insurance. Recurring costs are paid on a regular basis and include such things as interest payments on your loan, hazard insurance and PMI.

A seller credit will reduce the amount of your closing costs; it also reduces the amount of cash proceeds the sellers realize from the sale of their house. Asking the sellers for a credit amounts to asking them to accept a lower price. If there are multiple offers, an offer that includes a request for a cash credit from the sellers might not be competitive.

One way to offset a seller credit is to increase the purchase price. In order for this to work, the lender will have to appraise the property at the higher price.

THE CLOSING: Sometimes the only alternative is to wait to buy a house until you have enough cash for closing costs, particularly if you're trying to buy in a hot market. If, on the other hand, you're buying in an area where there is a surplus of inventory, particularly of new homes, you can usually find a seller or builder who'll be willing to pay for some of your closing costs.

Dian Hymer's column is syndicated through Inman News Features. Send questions and comments care of Inman News Features, 5335 College Avenue, No. 25, Oakland, Calif. 94618.

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