We’re a little tight on cash. How can we shift some settlement costs to reduce out of pocket expenses?

 Some buyers reduce the cash needed at settlement by scheduling closing at the end of the month. But there are several other ways to save on closing costs that may work better in the long run.

  • Skip late-month settlement Since interest on the loan is paid to the end of the month at settlement, the interest payment gets lower as you get closer to the end of the month. But another approach is to wait a few days until the beginning of the next month. That way, you'll need to pay more up front at settlement, but you'll gain a whole month's delay before the first full mortgage payment is due, because mortgage interest is paid in arrears, after the month has passed.
  • Reduce out-of-pocket cash Another way to reduce the cash needed at settlement takes some advance planning. By negotiating with the seller, the buyer may be able to pay more for the home and finance it, while the seller puts an equal amount toward out-of-pocket settlement costs.
  • Finance closing costs A third option is to find a lender who will finance closing costs by wrapping them into the mortgage. This method may, however, cost more over the long run, as lenders often will then charge a higher interest rate for a "no closing costs" loan.

What, exactly, is escrow?

 Most lenders require homeowners to pay hazard insurance and taxes, and, in some cases, mortgage insurance in monthly installments. The monthly installments go into an escrow account set up by the lender. The lender then pays the bills from the escrow account. A borrower might ask: “If I never see the bills, how do I know if the monthly set aside is correct?”

Find out correct amount.
You may need to contact your taxing authority and insurance carriers to get the amount for the bills. Your copy of the lender’s annual report to the Internal Revenue Service may also break down the expenditures from your escrow account.

Here are some danger signs that indicate you may be overpaying into your escrow account:

  • Your escrow payment is increased by the lender, but taxes and insurance have not risen;
  • The lender requests funds to cover private mortgage insurance after your equity exceeds 20%;
  • Your mortgage has by sold by one service company to another and the escrow amount is different;
  • A large amount of money stays in the escrow account;
  • Unanticipated or unexplained deductions are made from the escrow account at closing.

Will I be able to find out the results of the appraisal?

 Under new rules, home mortgage borrowers now have the right to a copy of the complete appraisal documents the lender used to decide whether or not to approve your loan. You may also see any in-house reports that affected the market value assigned your home.

Send for information.

Your lender may automatically send you a copy, but if not, you have 90 days to write for the appraisal after the lender informs you of the decision on your loan application.

As professionals, we are familiar with the real estate rules and regulations that might have you stymied. We’ll be happy to work with you and help eliminate any confusion about the home buying experience.

Will I have to get mortgage insurance?

 Private mortgage insurance is required by most lenders when the borrower’s down payment is less than 20% of the purchase price. The insurance protects the lender against default on the mortgage.

You may be able to reduce the cost, even if you can’t entirely avoid the expense of mortgage insurance, by asking for lender-paid insurance. Although most lenders don’t advertise the fact, they often will pay the mortgage insurance premiums in exchange for a slightly higher interest rate on the loan. This makes the insurance cost a tax deduction for you because it has become an interest expense instead of a non-deductible insurance premium.

Ask your lender for help.

But, since the higher interest rate stays in place for the duration of the loan, this plan is best for homeowners who plan to move by the time their equity reaches 20%, when the insurance typically would have been discontinued. If you plan to own the home for a long time, paying the insurance premiums yourself may be a better deal. Ask your lender for details.

What are some sources for out-of-pocket cash to pay closing costs?

 Sometimes the amount of cash needed to close a sale comes as a shock to first time buyers. Taxes, recording fees, insurance premiums, pro-rated interest, escrow deposits and other expenses can easily reach into the thousands of dollars. Rather than reduce the down payment to pay these costs, many novice homebuyers have other sources of funds they might not think of using.
Here are seven to consider:

  • Gifts Lenders like these best because they do not have to be repaid. Miss Manners may object, but this would be a good time to ask for cash in lieu of a birthday or wedding present.
  • Concessions Ask the seller to pay some of the closing costs. You may pay more for the home, but you will have more cash to use for down payment than if you use part of your savings for settlement expenses.
  • Lender programs Some lenders are willing to wrap the closing costs into the loan total, but will charge you a higher interest rate for the loan. You may be able to refinance for a lower rate later.
  • Sell something Some people have sold assets like an extra car, land, or stocks to raise the extra cash for closing.
  • Housing assistance programs Borrowers who meet moderate-income guidelines may be eligible for state or local loans or grants to help first-time home buyers.
  • Employer assistance Many companies have housing-assistance programs available through the Human Resources department. Some firms will allow an employee to borrow against a year-end bonus.
  • Borrow from yourself You may be able to take a loan out against your retirement account, life insurance or other restricted savings. You pay the interest to yourself. But be sure to repay what you borrow, since some programs have hefty fines and tax consequences if you don't.

What are some typical closing costs?

 When you apply for a mortgage, the lender must respond with a Good Faith Estimate of Closing Costs, which explains the costs you will likely have to pay at settlement. But the numbers on the form are estimates, and the final tally could be higher or lower.

Some of the more common charges are:

  • Loan Origination Fee: usually 1% of the loan;
  • Loan Discount Points: a form of accelerated interest; each point is 1% of the loan amount (who pays points is negotiable between buyer and seller);
  • Appraisal Fee: the charge to have a professional appraiser certify the value of the property being purchased;
  • Credit Report: the cost of getting a credit history from a credit service;
  • Tax Service Fee, Document Preparation Fee: charges to set up a tax escrow account and prepare mortgage documents;
  • Attorney Fees: the settlement agent's charges for processing the sale closing;
  • Title Insurance: charges for insurance to guarantee the validity of the property's title for the lender; buyers can also purchase title insurance at settlement to protect their interests;
  • Recording Fees, Tax Stamps: local charges to officially record the deed and mortgage, and transfer taxes;
  • Survey: the charge to verify the boundaries of the property being purchased.

What should I expect at the final “walk through?”

 Whether you buy a new home or one that has been occupied before, you want to make a final inspection before settlement. The “walk-through” should be scheduled long enough before settlement so any problems can be solved before you receive the keys.

  • Examine the home closely Examine the home closely to see that any contingencies the seller agreed to have been attended to. Then look for any flaws that might have escaped your notice earlier. For instance, how does the home look without your predecessors' furniture? Has the builder made any changes since you saw the home before? Are the items that are supposed to remain still there?
  • Negotiate problems In some cases, problems will have to be taken care of after settlement. Just make sure you have a written agreement to that effect (with a timetable specified), to prevent misunderstandings.
  • Ask all your questions Don't be shy about asking questions during your final walk-through. Make a checklist of questions and answers and put your requests in writing as soon after the inspection as possible.
  • Get some help if needed If you're not sure what questions to ask, take your agent or an experienced inspector along with you. Or consult a home maintenance book ahead of time to alert you to problem areas.

We can help with every step of your home-buying experience. Call us or e-mail us now.

Once a settlement date is set, can it be changed?

 Settlement it the last step in home buying – before the moving begins, that is! Sometimes called closing, settlement is where the seller receives the funds from the buyer and the buyer gets proof of ownership. While everyone does their best to meet the settlement date, it is important to remember that many things can crop up to delay the settlement.
For instance:

  • Credit problems Problems with buyer's credit history that must be explained.
  • Paperwork delays Unforeseen delays in processing lending paperwork.
  • Appraisal problems Delays in property's appraisal.
  • Contingencies Inspections and/or repairs that must be completed before settlement.
  • Unresolved liens Liens against the property that need to be resolved.
  • Personal Problems Personal problems (such as a death in the family) that lead to rescheduling.

Remember, delays in settlement do not necessarily mean the transaction is falling apart. Most transactions do eventually go to settlement. Many problems can be straightened out in a day or so. The key is flexibility.