The closing costs are 3% myth debunked

I just heard it again, a Real Estate Agent saying average closing costs to obtain a home mortgage loan in Minnesota are about 3%.

This simply is way too broad a statement about actual closing costs.

As an actual Minnesota mortgage lender for the past 26-Years, the perception that mortgage loan closing cost are about 3% in MN has never been really accurate. This gets spread around primarily because a conventional loan only allows for seller paid closing costs of 3% ( FHA Loan is 6%: VA Loan is 4%, convention is 6% with a large down payment ).

About 1/2 of closing costs are a set cost regardless of purchase price. The other 1/2 of closing costs are based on the purchase price. Take an appraisal for example, a $500 dollars appraisal cost is about 1% of a $50,000 Loan, but only .1% of a $500,000 Loan. Another example is the title company closing fee, which is now around $400. Again, regardless of purchase price., but can make a big difference in the overall cost percentage.

So lower priced homes tend to have costs of 4% to 5% of the price, while upper end homes tend to come in closer to 2% of the price.  Therefore getting 3% seller paid costs falls short of the real costs for many buyers.  These examples assume full closing costs and pre-paid items (taxes and insurance).

To make up the difference, lender can, and commonly offer you other options, like a no loan origination cost lan, or even total no closing costs loans. We also can do something called ‘lender credits’ to reduce out of pocket closing costs. While these options sound great, they are all achieved by increasing the interest rate. Therefore you pay costs over time, versus up-front today.

That is the same when asking for seller paid closing costs. You are paying over time, versus out of pocket today.

Finally, there is absolutely nothing wrong with any of these options. They just need to be understood and analyzed to see what is best for you.  A good Loan Officer will explain and go over all these items once we see a full application, and understand your financial position, amount of cash you have to pay for down payment and more.

Property understanding all these items, then working together with a great agent to property structure your offer will make sure you get a great overall deal on your dream house.

Be sure to ask your Loan Officer plenty of questions, and be sure you carefully pick the Loan Officer who will be handling your largest financial transaction of the average persons life.

If you are buying a home in Minnesota, Wisconsin, or South Dakota… I can be your Loan Officer.  Contact me at (651) 552-3681 or JoeMetzler.com.

 


Can you buy a house with no money down?

Can you buy a house with no down payment?

The answer is a definite maybe…

But no money down does NOT mean no money out of pocket.

So can you buy a house with no money out of pocket? The answer is not likely.

There are two programs to purchase a home that are truly no down payment programs. The VA home Loan for our military personal, and the USDA Rural Development loan for homes in rural parts of the state. Everything else will need at least a little down payment.

No down payment home loans

Next are some down payment assistance programs. Most of these require you put in at least a little money, and you get an assistance loan for the rest. A typical number is at least $1,000 down out of your own pocket.

Low down payment loans come in many varieties, but the conventional HomeReady program is just 3% down payment, and FHA loans are just 3.50% down payment – all of which can be a gift from family members too.

While most people understand ‘down payment’, in the home buying world, you also have up-front out of pocket costs, like paying for a home inspection.

You also have closing costs, which include lender costs, title company costs, state and county costs, plus buying things like your first years home owners insurance.

Many of these items can be rolled into the purchase through either ‘seller paid closing costs’, or through something known as ‘lender credits.”

While these two options can help eliminate up-front out-of-pocket expenses, neither one is free.  Seller paid closing costs is achieved by raising the purchase price in an amount equal to what the seller will pay.  For example, if the house price is $200,000, and you need $6,000 is closing cost assistance, you would offer $206,000 for the home.

Lenders credits is where the lender will pay some or all of your closing costs by increasing the interest rate so that you pay it back over time, versus needing the money up-front today.

There are also costs NOT related to the loan.

Inspections costs have nothing to do with the loan, and having to write an earnest money check to the seller have noting to do technically with the loan. So even if you are doing a no down payment loan, like a VA home loan, with “all closing costs” rolled into the loan, you may still need $500 or so for an inspection, and and maybe a few thousand dollars in earnest money when making your offer. Any earnest money can be credited at closing, so you can possible get it back, but you still needed it up-front to buy the house.

Bottom line is that if you have no money whatsoever, you are probably not ready yet to buy a home, but if you have at least a few thousand dollars, or can get a gift, we probably have a program for you.

Call our MN, WI, and SD mortgage loan experts today at (651) 552-3681, or just APPLY ONLINE.