Closing Costs

The fees associated with the buying or selling of a home are called closing costs. Certain fees are automatically assigned to either the buyer or the seller; other costs are either negotiable or dictated by local custom.  Both the buyer and the seller have closing costs.

Buyer closing costs

When a buyer applies for a loan, lenders are required to provide them with a good-faith estimate of their closing costs. The fees vary according to several factors, including the type of loan they applied for and the terms of the purchase agreement. Some of the closing costs, especially those associated with the loan application, are actually paid in advance. Some typical buyer closing costs include:

The down payment
Loan fees (points, application fee, credit report)
Prepaid interest
Inspection fees
Appraisal
Mortgage insurance (typically 1 years premium plus an escrow of 2 months)
Hazard insurance (typically 1 years premium plus an escrow of 2 months)
Title insurance
Documentary stamps on the note
Seller closing costs
If the seller has not yet paid for the house in full, the seller's most important closing cost is satisfying the remaining balance of their loan. Before the date of closing, the escrow officer will contact the seller's lender to verify the amount needed to close out the loan. Then, along with any other fees, the original loan will be paid for at the closing before the seller receives any proceeds from the sale.

Other seller closing costs can include:

Broker's commission
Transfer taxes
Documentary Stamps on the Deed
Title insurance
Property taxes (prorated)
Negotiating Closing Costs

In addition to the sales price, buyers and sellers frequently include closing costs in their negotiations. This can be for both major and minor fees. For example, if a buyer is particularly nervous about the condition of the plumbing, the seller may agree to pay for the house inspection.

Likewise, a buyer may want to save on up-front expenditures, and so agree to pay the seller's full asking price in return for the seller paying all the allowable closing costs. There's no right or wrong way to negotiate closing costs; just be sure all the terms are written down on the purchase agreement.

One thing to keep in mind if you are buying a home and may buy a short sale, the short sale lender often doesn't pay all of the closing costs on the seller's side and thus those costs are usually paid by the buyer. 

Prorations

At the closing, certain costs are often prorated (or distributed) between buyer and seller. The most common prorations are for property taxes. This is because property taxes are typically paid at the end of the year for which they were assessed.  They are paid twice a year in California.

Thus, if a house is sold in June, the sellers will have lived in the house for half the year, but the bill for the taxes won't come due for quite a while! To make this situation more equitable, the taxes are prorated. In this example, the sellers will credit the buyers for half the taxes at closing.

Buying a house

Getting Loan Approval - What Banks Look At

What is your FICO?

A FICO score is a credit score developed by Fair Isaac & Company to help lenders determine the risk involved in lending money to a person applying for a loan. It is widely accepted by lenders as one of the most important things to help determine eligibility as well as specific amounts, rates and terms that can be offered. FICO scores range from 300-850. The higher your score, the less risk involved in lending to you. There are many factors that influence your credit rating. Some of these factors, such as your payment history, weigh more heavily than others.  Your score can change frequently as new credit is established or paid down/off.  All factors can be grouped into 5 main categories:

·Payment History – Do you make your payments on time? Since this determines (on average) 35% of your score, it is obviously in your best interest to make all payments on time! Your payment history includes credit cards, car payments, mortgages, student loans and other loan types. Other public records on file, such as a bankruptcy, will be calculated in this group as well. If you have been late on payments bits of additional info, such as how recently these payments were made and how much time elapsed between the due date and pay date, will also factor into your score.

·Outstanding Debt – Most people have debt. The important factor is how much much debt do you have.  All outstanding balances for credit cards, car loans, mortgages, etc. will determine (on average) about 30% of your score. How many of these accounts have balances?  If you can significantly pay down or pay off credit card debt, this will really help during loan approval. 

·Credit History – How long have your current accounts been opened and how long has it been since you used each of them? This usually determines approximately 15% of your score. If you don't have a credit history yet, you should begin by establishing credit accounts and be sure to always pay them on time. The less credit history you have, the less you'll be able to borrow.  Read article about how to repair your credit.

·Pursuit of New Credit– Every time you apply for credit, there is an inquiry into your current credit score. How many inquiries into your credit score are there and how recent were they made? If you recently applied for a VISA card, Nordstrom account and car loan, you may want to hold off applying for a home loan for a few months. Each inquiry may slightly reduce your FICO score.  This usually accounts for approximately 10% of your total score.

·Types of Credit in Use – How many types of accounts are reported for ATM cards, car loans, credit cards, travel accounts, or any other type of account where payments are being made? This makes up about 10% of your final score as well.

Once your bank is aware of your FICO score they may or may not choose to share this information with you. Assuming they do share your score with you, it is important to remember the higher the score, the more likely you are to obtain a loan. Also, a higher score also means lower interest rates.  See two examples of home loans below and the amount of money you can potentially save while boasting a great FICO score.

Example of a 30 Year Fixed Rate Loan for $150,000
 
FICO Score                   

As you can see, over a long period of time you would save much money if you have a good credit rating upon loan application. For this particular loan, you have the potential to save $56,520 over 30 years. That’s money that could potentially be invested into your retirement, used for vacations, a new car or two, etc. etc. It pays to keep your credit score as high as you are able.

Now, a great FICO score is not the only determining factor in loan approval. There are additional factors that figure into the approval process as well. FICO scores aren't as important in FHA loans as with conventional loans.  Some examples include:

    * Income – Your current income will also be a significant determining factor in loan approval. Pay stubs for the previous two months as well as W-2 forms for the previous year will be requested to help determine your ability to repay the loan amount.

    * Employment History – Your employment history can tell a lender much about your stability. If you’re constantly switching jobs it could raise a red flag. However, as their may be other factors influencing your employment length (such as a spouse in the military), lenders may choose to ignore this factor.

    * Down Payment – Do you have a down payment? How much? Being able to provide a down payment can be extremely useful in the loan approval process. It means the amount borrowed will be less than the total cost to purchase the home. In some cases, depending on the amount of the down payment, your monthly payments can significantly drop.

The important thing to remember is that no matter what your FICO score, employment history or income levels are there are things you can do to help improve your chances of obtaining loan approval. Get referrals to local non-profit credit counselors or financial advisors to help optimize your resources fully.

And one last thought, get your finances in order, including working on improving your credit scores, before you get serious about buying a home.