Buying a house has many obstacles. Not only do lenders require good credit, you need plenty of cash on hand. Down payments can range from 3% to 20%, depending on your credit score. In addition, you have to pay closing costs. Unfortunately, some buyers forget about closing costs, which can be between 2% and 5% of the sale price. This adds to the total expense of buying a house, but there are ways to plan for closing costs.
1. Know the Average for Your State
The actual cost of closing costs, also called settlement fees, vary by area. If you're planning to buy a house, speak with a realtor or a mortgage lender. Either professional can provide a pretty close estimate regarding how much you'll need to set aside for closing. In some states, closing costs average 2% of the sale price, whereas other areas average 4% or more.
2. Create a Separate Savings Account
As you're saving for closing costs, open a separate savings account. This way, you can keep funds for your down payment, emergency fund and closing costs separate. If possible, open online high-yield savings account. These accounts offer higher rates than basic savings accounts, giving you the opportunity to maximize your savings.
3. Save Any Free Money Received
The more cash you have, the better. If you receive free money, such as a large tax refund, a work bonus or gift money, put this cash toward your house fund. Also, if you're considering selling personal items to generate extra cash, now's a good time to start. Put all proceeds toward your house fund.
4. Request Seller Assistance
If you don't have cash for closing, you can ask the seller to pay a percentage, or all of your closing costs. This approach only works if the seller has sufficient equity in the home, and he can afford to lose some of his profit. If the seller's motivated, he might pay your closing costs for a quicker sale.
5. Ask Lender to Pay Your Closing Costs
There's no harm in asking a lender to cover your closing costs. But in most cases, lender won't cover the entire fee, but they might waive certain fees or reduce the cost of certain fees, which reduces how much you'll need to bring to the closing table. Also, get multiple loan quotes from different banks. Closing costs can vary by financial institution.
6. Buy New Construction
As an incentive, some builders offer to pay a buyer's closing costs if he uses one of their preferred lenders. If you're thinking about building a house from the ground up, this is an excellent way to save money on the purchase. With the builder covering your closing costs, you only need cash for a down payment.
7. Accept a Higher Interest Rate
If your mortgage lender agrees to pay your closing costs in full, be prepared to pay a higher interest rate on the mortgage. This way, the bank can recoup the money it spends to cover your settlement fees. For example, if you pay your own closing costs, you might qualify for an interest rate of 3.8%, but if the lender pays your closing costs, your rate might jump to 4.3%.
Closing costs can be a roadblock to homeownership, but there are ways to purchase even if you're short on cash. What are other ways to plan for closing costs?