Home Buying in 37209>Question Details

Sean, Other/Just Looking in 37209

Closing Costs/Prepaids

Asked by Sean, 37209 Wed Apr 7, 2010

What is the average percent of purchase price for closing costs and prepaids? Can that amount be rolled into the mortgage or do you have to show up with that cash along with your down payment?

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Hey Sean,

I have a lot of first time home buyer that roll the cost of closing costs and prepaids into the mortgage. The way you do this is by upping the purchase price so that the seller will pay for the costs. I tell all my clients to use 3% of the sales price for closing costs and prepaids.

If you don't roll the costs into the purchase price and have the seller pay for it, then you will have to come to closing with more money than just your down payment.

There are also programs out there like THDA (http://www.thda.org) that can help out with some costs.

I would be happy to help you figure some of this out just let me know!

Brittney Testerman
Pilkerton Realtors
Web Reference: http://LiveInNashville.com
2 votes Thank Flag Link Wed Apr 7, 2010
Hi Sean,
Another caveat to consider is this....lenders and Realtors both say"just ask for the 3% closing costs and ( prepaids, but in the negotiations this may hinder the price that you want for the house, so sometimes, I find that Sellers may do better with just a dollar amount included....now you may think that this is the same, but actually it is just a psychological factor.....and usually you really do not need 3 % because a Seller does not want to to pay a Buyers origination fee....(and it could be 2 %)....Laura at Pilkerton Realtors 371.2474, 977.9088
1 vote Thank Flag Link Tue Apr 20, 2010
There are tons of factors to consider here. If you are using an FHA loan, then the 2.25% upfront mortgage insurance premium can indeed be rolled on top of the loan. Additionally, the amount of closing costs will vary depending what time of month you close - if you close early in the month, for example, you will have more "prepaid interest". Additionally, you should consider whether or not you want to pay an origination fee. Origination is typically 1% of the loan value and it "buys" your interest rate down a bit. I normally counsel my buyers NOT to pay origination if they plan to stay in their homes for five years or less OR if they plan to refinance within 5 years.

It is important to try to get a Cash-To-Close estimate from at least two recommended lenders prior making your offer. This way, you have a good idea on how you want to structure your offer. This article may help:
1 vote Thank Flag Link Thu Apr 8, 2010
I guess that's what I get for trying to answer the question from my iphone (see below).
The agents that answer questions on here are typically right on. The answers below are great! I hope you got what you needed.
Stephen Strickhausen
1 vote Thank Flag Link Thu Apr 8, 2010
I'm with Britney on this one - I usually try and get 3% of the purchase price in closing costs and prepaids from the seller to help my buyers out. That being said, if you are doing an FHA or VA loan, you have to be careful because there are limits imposed by those two agencies on the amount that you can use.

Example: Let's say that the seller agrees to pay 3% closing costs and prepaids, but FHA only allows 2.5% to be contributed by the seller. Then you have lost that .5% and the seller pockets it.

So it's good to do your homework and ask your realtor and lender to help you stay on top of that.

Britney is also correct in the fact that there are programs out there like THDA and NACA, etc. which can be very helpful in assisting buyers. There are special stipulations with any programs like these and you have to fit their criteria to make it happen.

Also remember that while you can roll the closing costs and prepaids into the mortgage, it does not always work to your advantage in terms of negotiating the price of the home. You are actually in a weaker negotiating position if you have to ask for help from the sellers. Be prepared to pay a higher price for the house.

Great question and I hope that my answer is helpful to you!

Emily Lowe
The Lipman Group Sotheby's International Realty
1 vote Thank Flag Link Wed Apr 7, 2010
I just want to clarify that 1.5 to 2.5% closing costs is probably only factoring in loan origination and related loan costs (appraisals, various fees for courier expense etc). The total closing costs including prepaids is usually more like 4-4.5% for an average/median priced home in this area.

It's important to talk to your lender prior to making your offer so you can get not only the good faith estimate, but also confirmation of how much the loan program and lender will allow the seller to pay on your behalf. I've seen buyers not get the full amount agreed upon in their contracts (not my buyer clients) because the lender didn't allow the full amount. By knowing what your closings costs should be (based upon the GFE) and how much will be allowed as a seller concession will help you draft your offer.

In the cases where the closing cost amount either wasn't allowed - or in some cases were less than what was asked for and agreed to in the contract - the buyer just lost out. The difference isn't deducted from the sales price and the seller just keeps the excess amount. If the buyers had more accurately requested the closing costs they could have negotiated a lower sales price with the same net to seller.
Web Reference: http://www.abodeTN.com
1 vote Thank Flag Link Wed Apr 7, 2010
as a general rule, buyers can expect between 1.5 and 2.5% on average. But rules change...so...DISCLAIMER: PLEASE speak with your lender to get a better answer to your question. That's just a very general guideline used in some 1st time homebuyer classes I have attended.

There are too many ways to deal with those costs to keep this post short and witty. Since you'd probably fall asleep or get overwhelmed halfway into reading the options to reduce the cash you bring to closing, I'll leave you with the best advice I can and leave the explaining of those options to the lender.

1) Get a great lender, who you can sit down with in person and ask lots of questions like this one. Get them to prequalify you for an amount and to show you a breakdown of what you can expect for closing costs and prepaids.
2) Get a great realtor, who can team up with you and your lender to determine all the options available to help you figure out the house that fits into that prequal guideline and might have some option for a seller to pay some of those closing costs and prepaids on your behalf, if you need to keep those costs down.

Hope this helps a little or a lot. thanks for checking with Trulia - great question!
1 vote Thank Flag Link Wed Apr 7, 2010
Great question. Here in Nashville it is
1 vote Thank Flag Link Wed Apr 7, 2010
Each state has different closing costs, and there will be different lender/broker costs as well. You should speak to a reputable loan officer, who will not give you a formal GFE right now, but should be able to give you some kind of cost estimator. It is difficult to say a percentage because there are many things that go into it, including taxes and homeowner's insurance.
As far as rolling them into your mortgage, the only way to do that is to try to work in a seller's concession, which may cover all or some of the costs. The issue is that the house has to appraise for the higher amount. Also, with short sales or foreclosures there may be additional costs, plus it is rare to be able to work a seller's concession on those.
1 vote Thank Flag Link Wed Apr 7, 2010
With USDA, yes, it can be rolled in (provided the home appraises for this full amount). With FHA and VA, cannot be rolled in. With all loans, seller is allowed to pay the closing costs and pre-paids.
0 votes Thank Flag Link Thu Apr 8, 2010
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