Your First-Time Home-Buyer Questions Answered: Who Pays Closing Costs?

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When purchasing a home for the first time, there are lots of questions that come up during the process. At NeighborWorks Orange County, we are here to help you through the entire process.

One of the most common questions first-time homebuyers ask is, “Who pays the closing costs?” To help, here is a quick overview of closing costs.

Closing Costs Are Different than a Down Payment 

Perhaps the biggest challenge in understanding closing costs is differentiating between closing costs and the down payment. Before we dive too far into closing costs, let’s do a quick break down of each. Depending on which loan option you chose, the down payment varies between 3-3.5% of the total loan. For example, a 3% down payment on a $200,000 home is $6,000.

Lenders require you to bring money to the table to purchase the home. They want you to have your own money invested into the deal. To learn more about down payments, check out our guide Everything You Need to Know About a Down Payment.

Your closing costs cover all the expenses that come up during the transaction. Purchasing a home is a big investment with several moving pieces. You need to make sure the home is safe and that it’s worth what the seller is asking, apply for a loan, and have help with the paperwork. To make sure you are protected, you work with experts throughout the process. This includes brokers, inspectors, appraisers, and more. The closing costs cover their fees. 

Typical Costs Included

There are many different factors that go into determining the exact amount you will owe in closing costs. Some fees, such as property tax, are determined based on the value of the home. Others are a flat fee. Your realtor and mortgage broker can help give you estimations on a range of fees to anticipate when starting the process of making an offer. Once the seller accepts your offer and you have a final amount for the loan, you can get exact numbers for your closing costs.

Here are typical expenses included:

  • Title company,
  • Appraisals,
  • Title Insurance,
  • Property Tax,
  • Escrow,
  • Origination fees

Every case varies. No two closing fee costs are ever exactly the same. While we can’t guarantee what your final costs will total, typically closing costs range in the 3-4% of the total price of the home.

Who Pays Closing Costs?

It’s standard for the buyer to pay the closing costs.

There are occasional instances that a seller will pay closing costs. That needs to be negotiated and is largely dictated by how strong the market is or how motivated the seller is to sell the home. In the current market conditions, a seller’s market, it’s very unlikely that a seller will agree to pay closing costs.

Especially in a hot market, as a buyer you want to give the seller an attractive offer on their home. Requesting they pay closing costs doesn’t necessarily accomplish that. If they get other offers, most likely the seller will pick one of those. Make sure to work with a good realtor to ensure that you make a good offer when home searching. 

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Working With Down Payment Assistance Programs

Many of our clients qualify for one of the Down Payment Assistance Programs.

Two programs, WISH and IDEA, offer 3-to-1 matching funds up to $15,000 to apply toward a down payment. This means if qualifying applicants save $5,000 toward their home purchase, the assistance program will pay $15,000 toward the home.

One of the unique advantages of the programs is that you have the freedom to apply your money to the deal in whichever way makes the most sense for your family. We advise our clients to use the funds they bring to the table on their closing costs. With the assistance program covering the down payment, typically this makes the most sense.

Learn more about the down payment programs out there.

Help Throughout the Process

 Buying a home can be an overwhelming process. There are several moving pieces, and understanding all the requirements can be daunting.

That’s why we invite you to partner with NWOC throughout the process. Starting with our Home Buyer Workshops, we teach you about all the different elements to buying a home. This one-day course prepares you to successfully enjoy homeownership. We also have experienced realtors to help you search for your home.

Contact us today to start your journey toward homeownership!

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How Tax Returns Can Help with Homeownership

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It’s tax refund season! Every year April brings a frenzy to button up all our tax documents and file our taxes before the mid month deadline. Whether you opt for online software, use an accountant, or qualify for the Volunteer Income Tax Assistance (VITA) program, completing all the tax forms and submitting your financials to the IRS always takes quite a bit of work.

The work comes with a bright side if you qualify for a tax return. In some cases, the refund adds up to quite a sum. According to Smart Asset, the average Californian tax refund is $2,810.

For many families in California, particularly in the Orange County area, $2,810 is a substantial amount of money. That is the equivalent of saving just over $200 a month for the entire year. For some families, saving that amount each month can be incredibly difficult. Many of the families we work with have budgets that are tight as it is. Oftentimes, unforeseen expenses pop up throughout the year that deplete monies earmarked for bigger goals.

Which is why the possibilities of applying a tax refund to a bigger and life-changing goal is so exciting. If you’re joining the nearly 80% of American who receive a tax refund each spring, we would like to invite you to explore how it can help you achieve your homeownership dreams.

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Applying a Refund to a Down Payment

There are specific rules around the types of funds that you are allowed to use toward your down payment. The bank wants to ensure that you are able to save funds on your own. This reassures them that you will be able to pay your mortgage each month. Depending on your loan requirements, you will need to meet different minimum amounts that you bring to the transaction.

The good news is that your tax refund is considered money you saved! Technically a refund is money that you overpaid the government during the course of the year. This means that there are no requirements dictating how long your refund needs to be in your account before you use the money.

 

Using a Refund in Combination with Down Payment Assistance Programs

First-time buyer assistance programs typically require a down payment ranging from 3%-5% of the house value. In Orange County, we live in one of the areas of the country with higher costs of living. A modest two-bedroom family home here can average $350,000. That means a down payment of $10,500–$17,500. While $2,810 is a great start to savings those funds, the entire amount can be a little daunting.

That is where our down payment assistance programs come in.

We offer specific programs designed to get first-time homebuyers into homes by matching funds going toward the down payment or closing costs. If you previously owned a home, but lost it in a short sale or foreclosure, you are reclassified as a first-time homebuyer. This means that you can qualify for down payment assistance programs as well.

Both the Workforce Initiative Subsidy for Homeownership (WISH) and the Individual Development and Empowerment Account (IDEA) programs allow you to apply your tax refund toward a matching down payment grant. Each program matches up to $15,000 in their 3-to-1 down payment grant. To receive the full $15,000 in assistance means that you only need to raise $5,000. While a $2,810 tax refund seems daunting to cover the full 3%-5% down payment, it brings you extremely close to $5,000.

If you need a few months to save the remaining amount, the IDEA program works with individuals and families for up to ten months to save their down payment. If you choose to move forward with your current tax refund, the program would match that amount 3-to-1. With our current refund example, that would be adding $8,430 to your down payment. A $300,000–$350,000 home is within reach!

 

Being Intentional With Your Refund

According to a Georgetown Institute for Consumer Research 2015 finding, 30% of consumers plan to spend their tax refund by either buying a treat or purchasing something needed. They also noted that individuals who saw a refund as an end-of-year bonus were more likely to spend their refund at a store they typically didn’t shop at. 

This year make an intentional plan on how you can use your tax refund to improve your family’s financial position. For some families, this can be a step toward homeownership. For others, it might be time to pay down debt or save an emergency fund.

If you’re unsure that putting your tax refund toward your down payment is the best financial step for your family, connect with one of our homebuyer coaches. Our experienced professionals at NeighborWorks Orange County are HUD-approved counselors who can help you build a personalized road map toward homeownership.

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How to Calculate Closing Costs

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There’s no denying that there are a lot of moving pieces in purchasing a home. As a buyer, you work with a Realtor, a mortgage broker and several other professionals to navigate the nuances. Even with their support, the whole process can be a lot to take in.

All too often buyers come to the final stages only to be sidelined by closing costs.

Especially in Orange County, saving up a down payment is a substantial accomplishment. It can be disheartening to all suddenly realize that there is one more fee you need to address tacked onto the price tag. 

There is a lot of confusion around closing costs. To help prepare you for the process, we are breaking down closing costs and answering your most commonly asked question.

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Difference Between Closing Costs and a Down Payment

The biggest confusion we see is buyers not realizing that closing costs and down payments are different.

Let’s start with explaining what a down payment is. Down payments are a percentage of the loan that you bring to the table when securing a mortgage. With the exception of VA loans, lenders don’t want to write no-money-down loans. This means that the lender is putting down 100% of the funds. Instead, they have the buyer put their own funds into the transaction as well. This gives the lender more confidence in your ability to pay your loan each month.

While many times you hear professionals or other industry experts recommend saving 20% of the entire home loan for a down payment, most providers only require a minimum of 3%-5% down.

Additionally, there are certain requirements on what types of funds you can use toward your down payment. For example, you cannot use gift funds until you have met the minimum requirements. Also, funds must have been in your bank account for two to three months prior to the bank reviewing your statement. These rules help the bank gain confidence in your ability to save money and manage finances demonstrating that you can make monthly payments.

The closing costs, on the other hand, are not about building trust and showcasing reliability to the bank. 

Remember when we started how we mentioned that there are many individuals who help you navigate the home-buying process? These include an appraiser, an inspector, escrow company, and others. Their job is to protect you in your purchase. For example, you hire an inspector to ensure the home is safe and that you aren’t bringing yourself into a situation with costly home repairs.

Closing costs cover their fees.

Here are standard expenses that will likely be included in your closing costs:

  • Title company
  • Appraisals
  • Title Insurance
  • Property Tax
  • Escrow
  • Origination fees

Unlike down payments, closing costs do not have specific requirements on where the money comes from or how long it has been in the bank.

 

Calculating Fees

Unfortunately, there isn’t a clear-cut formula to calculate your closing fees. It all varies, depending on your provider and the cost of your home. Some fees will be flat fees. Others will be based on the home’s value.

Typically closing costs range from 3-4% of the total value of the home.

If you are purchasing a $300,000 home, your closing costs would likely range from $9,000 to $12,000, a $200,000 home would range closer to $6,000 to $8,000.

Make sure to talk with your Realtor and mortgage provider throughout the process. They can give estimates prior you making an offer on a home. Additionally, there are often options for paying your closing costs. Some mortgage providers give you the option of rolling your closing costs into the total of the loan. Other times providers will carry the closing costs and increase the interest rate on your loan. Individuals who qualify for down payment assistance can allocate their funds toward closing costs, putting the assistance to satisfy their down payment.

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Experienced Professionals to Help You Through the Process

At NeighborWorks Orange County, we are your trusted advisors throughout the process. Our primary focus is to educate and empower families and individuals along their journey to homeownership. We accomplish this through hosting home-buying courses, offering one-on-one coaching and pairing you with service providers with the heart of a teacher. No matter where you are on your journey, we are here to help.

Start with our free home-ownership counseling. Together we can help you establish a game plan towards purchasing your own home.