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.
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
- Title Insurance
- Property Tax
- 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.
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.
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.