closing costs

Understanding the Closing Process: What Every Homebuyer Should Know

Congratulations! You’ve found your dream home, navigated through the inspections and negotiations, and now it’s time for the final step – the closing process. This is the moment when you officially become the proud owner of your new home. However, it’s crucial to understand the intricacies of the closing process to ensure a smooth transition from buyer to homeowner. Let’s dive into the essential aspects every homebuyer should know.

The Closing Process Unveiled

The closing process is the last phase in the homebuying journey, and it involves several key steps. Understanding each of these steps can help you approach the closing table with confidence.

Escrow and Earnest Money

Before the actual closing date, you’ll likely deposit earnest money into an escrow account. This shows the seller that you’re serious about the purchase. If everything goes smoothly, this money is applied to your down payment at closing. If not, it could be forfeited to the seller, depending on the circumstances outlined in the purchase agreement.

Title Search and Insurance

A title search is conducted to ensure that the property’s title is clear of any encumbrances or claims. Title insurance is then purchased to protect both the lender and the buyer in case any unforeseen issues arise. This step is crucial in preventing potential legal headaches down the road.

Home Inspection and Appraisal

Before closing, a home inspection is usually performed to identify any hidden issues with the property. Simultaneously, an appraisal is conducted to determine the fair market value of the home. Both of these steps are essential for negotiating repairs and ensuring you’re not overpaying for your new home.

Reviewing Closing Costs

Closing costs encompass various fees and expenses associated with finalizing the home purchase. These may include loan origination fees, attorney fees, title insurance, and property taxes. It’s essential to carefully review these costs and, if possible, negotiate with the seller to share some of the financial burden.

Finalizing Your Mortgage

As you approach the closing date, your mortgage lender will provide a Closing Disclosure. This document outlines the final loan terms, monthly payments, and closing costs. Review it thoroughly and compare it to the Loan Estimate you received earlier in the process to ensure consistency.

The Closing Day

Finally, the big day arrives! The closing day is when you’ll sign all the necessary documents to officially transfer ownership of the property. Be prepared to spend some time at the closing table, carefully reviewing each document. Don’t hesitate to ask questions if something isn’t clear.

Navigating Potential Challenges

While the closing process is generally smooth, challenges can arise. Common issues include financing hiccups, unresolved repair negotiations, or last-minute changes to the terms. Staying proactive and communicative with all parties involved can help address these challenges efficiently.

Celebrating Your New Homeownership

Once all the documents are signed, and the funds are transferred, congratulations are in order! You’re officially a homeowner. Take the time to celebrate this significant milestone in your life. However, remember that homeownership comes with responsibilities, such as property maintenance and homeowners association obligations. Prepare for this exciting journey by familiarizing yourself with these responsibilities.

Conclusion

The closing process may seem like the last leg of a long journey, but it’s a crucial one. Understanding the steps involved can empower you as a homebuyer and make the entire experience more enjoyable. From earnest money to signing the final documents, each step plays a vital role in ensuring a successful and stress-free closing. So, take a deep breath, stay informed, and get ready to unlock the door to your new home. Welcome to homeownership!

Get Help With Your Down Payment

It’s frustrating to have a decent-paying job, a bright earnings future and acceptable credit and still not be able to buy a home because you lack the thousands of dollars in cash needed for a down payment and closing costs.

The dreaded down payment stops more potential homeowners cold than any other aspect of the loan process.

To read articles about down payment headaches one would think it’s only millennials who have trouble coming up with the funds.

In reality, most would-be first-time homebuyers, regardless of age, find saving up 20 percent of hundreds of thousands of dollars challenging.

Sure, you may qualify for a loan with a lower down payment, but do you really want to add to your monthly house payment by purchasing the mandated private mortgage insurance policy? That’s what’s required if you don’t have 20 percent equity in a home you purchase.

Today, we’ll explore ways you can get help with the down payment on your new home.

Crowdfund your down payment

Enter, HomeFundMe CMG Financial, which offers a brilliant way for you to come up with that down payment: Crowdfunding – with the approval of Fannie Mae and Freddie Mac.

Before the crowdfunding concept came into being, lenders stipulated that your down payment and closing cost funds must come from your savings (mutual funds, stocks, IRA and 401(K) included), proceeds from the sale of another property, assistance from government programs or non-profits, union, employers or gift money from an immediate relative.

HomeFundMe allows anyone to donate funds to help you buy a home and CMG Financial provides the online platform.

While many crowdfunding endeavors offer a return on investment, the HomeFundMe program returns nothing to those who give. Money given is considered a gift, although they can make the gift conditional on the money eventually going to fund a home purchase.

The program offers incentives to savers, however. Attend credit counselling and education classes and you may receive a grant of up to $2,500. Then, the crowdfunding platform will match donations “$2 for every $1 raised, up to $2,500,” according to CNBC’s Diana Olick.

Get help from the government

The government, from local to county, state and federal, offers programs to help Americans get into home ownership. Some of these programs are geared toward the low-income applicant while others are open to all.

Federal Home Loan Bank

The Federal Home Loan Bank offers three programs to help homebuyers with their down payments and closing costs:

Home$tart® — Assistance up to $7,500 for borrowers who take the homebuyer education program and earn up to 80 percent of their area’s median income (find yours on HUD’s website). Unlike the aforementioned programs, these funds come in the form of a grant.
Home$tart Plus — $15,000 to borrowers who are currently receiving public housing assistance. Borrowers must complete a financial literacy program and be income qualified.
Native American Homeownership Initiative (NAHI) — $15,000 to eligible Native American households to help with a down payment and closing costs.

Good Neighbor Next Door

This program falls under the auspices of the United States Department of Housing and Urban Development (HUD) and offers a discount (typically 50 percent) off the asking price of a home. The program is open to applicants in the following professions:

Pre-Kindergarten through 12th grade teachers
Law enforcement officers
Emergency medical technicians
Firefighters

Be aware that this program only covers homes in HUD’s revitalization areas that are listed for sale through this program.

Learn more about the program and how to apply on HUD’s website.

State and local programs

FHA offers state-wide down payment grants through a variety of programs. Search for them here.

Search for local programs at Freddie Mac’s website.

The National Association of Local Housing Finance Agencies (NALHFA) suggests using downpaymentresource.com to find information on local assistance programs.

provides local-level program information.

Finally, several labor unions, such as the Culinary Union, offer homebuying assistance programs for members.

The down payment isn’t the whole enchilada – here’s how much cash you’ll need to buy a house

The real estate industry has done a bang-up job on letting consumers know they’ll need some cash when they purchase a home. Typically, it’s the down payment that’s mentioned. Seldom are closing costs brought up so they end up a major surprise for homebuyers.

Between the two of those huge chunks of money are other cash outlays you’ll need to consider.

Earnest Money Deposit

You found the home you want to buy and you and your agent structured the perfect purchase agreement. In it, you’ll find a section dealing with your earnest money deposit (EMD). Your agent will list the amount you are paying and where it will be held.

So, what is this? There are several functions of an earnest money deposit. First, it shows the seller that you are serious about pursuing the purchase. After all, he or she will be taking the home off the market. This “skin in the game” evens the playing field. The seller takes a gamble by removing the home from the market and you put your cash on the line with the possibility of losing it, under certain circumstances.

The amount of money used for your EMD varies according to several factors, including what type of market you’re in (in fast-moving markets, a larger-than-normal EMD may entice the seller to choose your offer).

Typically, it’s 1 to 2 percent of the offering price. In May of this year the median home price in the U.S. was $345,800, which would mean an earnest money deposit of between $3,458 and $6,916.

Down Payment

When the seller accepts your offer, your lender will request that you wire them your down payment funds.

Down payments are expressed as a percentage of the purchase price of the home. For example, using our national average home price, you will need $69,160 for a 20 percent down payment, $34,580 for a 10 percent down payment, $17,290 if you are required to come up with a 5 percent down payment and $12,103 for a 3.5 percent down payment.

Down payment percentages depend upon the loan you’ll be obtaining. Conventional loans generally require 20 percent down and the best choice if you hope to avoid paying a monthly private insurance premium.

Other loans, such as those through FHA or Fannie Mae, require significantly less for the down payment, while the VA and USDA require no money down.

This is the part of the process that catches far too many homebuyers by surprise. Closing costs are all the fees required of everyone who helps you purchase the home. From your real estate agent’s commission and appraiser’s fee to the title company’s research and issuance of a policy and, of course, the lender’s fees. These fees add up – fast – so it’s important to compare closing cost estimates from several lenders. It’s also important to understand which costs are negotiable.

It’s not unusual for closing costs to amount to 2 to 5 percent of the loan amount. Using our average home price mentioned above, with a 3.5 percent down payment, the loan amount will be about $333,697. Closing costs would be anywhere from $6,674 to $16,685. As you can see, closing costs, if not prepared to pay, can come as quite a shock to homebuyers.

3 Ways to reduce closing costs

1. You can reduce a portion of your closing costs by closing as late in the month as possible. Lenders charge interest in arrears, meaning that when you make a house payment, you are actually paying for last month’s interest (and the coming month’s principal). When you close escrow, the lender will have calculated how much interest you owe from the date your loan was funded to the end of the current month.

For example, if you close on your new home on August 15, you’ll pre-pay the interest due from August 15 until August 31. September’s interest isn’t due until October 1, when you will make your first house payment.

Reduce the pre-paid interest charge by closing at the end of the month.

2. You can eliminate the need to pay all or part of your closing costs by requesting that the seller contribute. The seller gets to write that amount off as a tax deduction and you get to skip the closing costs, so it’s beneficial to all parties.

3. Ask your lender if you can include the closing costs in your loan. Yes, there will be a charge for this but it won’t be nearly as large as the immediate outlay of cash necessary to pay closing costs.

Despite what many first-time homebuyers think, the down payment isn’t the whole ball of wax when it comes to cash outlays when you purchase a home. It’s important to determine exactly how much cash you’ll need to purchase a home so that you can budget for these expenses.