Closing Costs--How to Avoid Them

Mortgage closing costs can sometimes be an ugly surprise, especially when you are the buyer in a purchase transaction. Knowing how the closing costs work in a mortgage purchase transaction can save you a lot of grief and can potentially save you a lot of money. Here are a couple of key things to understand about the closing costs in a purchase transaction:

The closing costs cannot be financed into the loan amount on a purchase mortgage.

In a refinance transaction, the entire amount of the closing costs can be added to the loan amount, so there is no need for the borrower to pay any money out of pocket.

In the purchase transaction, the buyer must pay his or her portion of the closing costs out of pocket, in certified funds at the closing.

To avoid having to pay for the closing costs out of pocket, the buyer can ask the seller to pay for the closing costs. If the seller agrees, the closing costs that the buyer would normally have to pay are simply deducted from the amount that the seller would net from the sale of the house.

Aside from getting the seller to agree to pay closing costs, there are two other important factors at play in this situation. For this to work, the sellers will sometimes increase the sale price of the house to compensate for the closing costs they are paying for.

In this situation, it is essential that the house appraise for enough to cover the original sales price plus the closing costs.

Also, almost all lenders will limit the amount of closing costs that the seller can pay for the buyer. Typically, the limit is either 3% or 4% of the total loan amount.

As long as the closing costs can be limited to 3% to 4% of the loan amount and as long as the home will appraise for enough, a buyer can ask the seller to pay all closing costs and increase the total sales price to compensate. The moral of the story is that the buyer does not have to come up with any money at the closing.

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