What are closing costs? When you select a bank or credit union for your financing, they will go over a good faith estimate of costs that you can expect at the closing. Closing costs can be paid by you or you may ask for the seller to credit you for a portion of these costs. When you write an offer for a home, your REALTOR can request that the seller contribute X amount for buyer's closing costs and/or prepaid expenses. What is the difference between closing costs and prepaid expenses? Let's take a look at each of them.
Closing Costs--These are the costs associated with obtaining a mortgage and can include things like:
1. Origination/commitment fees (these fees are not typically charged by credit unions, larger banks like Wells Fargo or US Bank may have these fees, usually 1% of the mortgage amount)
2. Flood certification
3. Employer verification
5. Title Opinion/Title Guaranty
7. Recording Fees
8. Credit Check
Prepaid Expenses--These are the other costs associated with purchasing a home and can include things like:
1. Homeowner's insurance (which is paid upfront for the 1st year, then paid monthly as part of your mortgage payment for subsequent years)
2. Whole house inspection
3. Radon inspection
4. Pest/Termite Inspection
5. Buy-down of the interest rate with discount points (not much of this as interest rates have been so low)
For most loan programs, the maximum for seller credits is up to 3% of the purchase amount. In the case of FHA loans, the buyer is required to have 3.5% of their own money in the purchase, so we must be aware of the threshold for seller credits. In Cedar Rapids and Iowa City area, usually about $2500-$3000 will cover the closing costs and most of the pre-paid expenses when purchasing a home.
For specific questions about financing options and costs, I can recommend some great local lenders at any bank in the Corridor. I would love to help you get into a new home in 2019!