Avoid Closing Cost Sticker Shock

Buying a house involves a lot of costs that you may not initially expect. If you are buying a house for $ 400,000, and putting down a hard-saved 5% of $ 20,000 with a $ 380,000 FHA loan, you may think…..”Wow, we’ve got the $ 20,000 we need, isn’t that great! ”

It is quite possible that, when you are closing the deal, the escrow company will call you 2 days before close and say..,,, " send us $ 30,000"..... not $ 20,000! ................ouch!....... How much? ……………………What on earth can that be for?

Let’s have a look at why that might be true and how to prepare for it.

First of all, the escrow company is the only place you will get an exact number for your closing costs. However, they themselves cannot give you that number until the very last minute, so that does not help you very much.

The next best place to get an approximate number, and the most commonly used, is your lender. Your lender should give you what is called a “Good Faith Estimate” which lists all the costs with an approximate amount. If you don’t get one, ask! A good lender will work out all the costs associated with the purchase and put in a little extra for unexpected items.

Your realtor can also give you an estimate, but often will not have access to the loan costs, so the lender is the best place to get a reasonably accurate number.

Here are some of the costs that you will face:

1) Property taxes: You will have to pay some of the taxes paid by the previous owner for the period you are taking over; this varies according to when you buy the house. It can be a lot. Your bank may also insist that you “impound” you property taxes and could ask for as much as 6 months property taxes to be paid to them in advance! Ouch! Some of these may be based on the OLD tax rate for the house, not on your new tax rate based on your purchase price. You would get that back in the future, but right now, it is cash out of pocket.

2) Home Owners Association fees. You may have to pay some of this month and next month.

3) Insurance: you may have to have this impounded also and pay some in advance.

4) Escrow fees, title insurance fees, document fees, HOA transfer fees etc etc.

5) Loan fees. You hear about “No-cost” loans, but the costs are somewhere! Either you pay a higher interest rate, or you get fees and a lower rate. This can be a decision for you based on how long you intend to live in the house. The lowest rate will almost always have fees attached and these can be quite a lot if you want the lowest rate. No-one is out there doing this for nothing.

Get to grips with your closing costs early on so they do not bite you in the behind at the last minute.