The day you close on your new home does not need to be full of chaos or surprises. You need to understand very early on in the home loan process how much money it is going to take from you to close the deal. The funds required to close is disclosed to the buyer from the lender in the form of the Good-Faith-Estimate (GFE). This estimate should be given to you the day you make your loan application and should be reviewed with you by your loan officer to make sure you understand it and any changes that could impact it while your loan is in process. Let's take a look at what is included in this estimate so you know what to be on the look out for.
Cash for closing is going to be broken down into 4 categories:
1. Closing Costs - these are the fees incurred to close your loan. Some of these costs are fixed and some are based on a percentage of the loan amount. They include everything from the appraisal, closing attorney, title insurance and origination fees. At a specific loan amount, your lender will be able to give you a very close figure of what these will total. Some 3rd party fees may very slightly, but not by much.
2. Prepaids - also known as Escrow Accounts - also known as Impounds. If you are going to have an escrow account associated with your mortgage (very good idea), you will fund this account at closing. The amount of taxes and insurance collected will very from state to state, but you will be given a number that is based on several assumptions. At your loan application, your lender does not know the exact property taxes, nor where you are going to go for insurance and what those insurance costs will be. You need to make contact with your insurance company as soon as possible so the actual premium numbers can be used. If your new home is going to require $700 in annual flood insurance, it would be nice to know that sooner than later.
3. Down Payment - this is usually a % of the sales price. Many borrowers are opting for zero down payment loans in an attempt to keep their cash at closing to a minimum. Make sure you review other loan programs with down payments to make sure you are on the loan that is best for your situation.
4. Interim Interest - this is your pro-rated payment for the month that you close. If you borrow $200,000 at 6.50%, it is going to cost you $35.62 for every day left in the month that you close. This is why most real estate closings will happen toward the end of the month. It will not cost or save you any money for your specific closing date, it is just a matter of when you start paying. Changes to your closing date will impact this number.
Make sure you understand your GFE when you make your loan application and it is a good idea to review it with your lender a week before closing. The closing attorney or title company will prepare the HUD-1 Settlement Statement which details all the numbers with the sale. You need to know how much money is going to be expected of you at closing and until the HUD-1 is ready, your GFE is the best estimate you will have.