Purchasing the first house is a watershed moment in the lives of young couples and individuals. Representing the promise of a happy future, the first home has a way of eclipsing all of the expense and headaches that come with ownership. In fact, the excitement makes it easy to forget that -- even with home financing -- there will be monies owed at settlement time. Qualifying for the mortgage is only a first step, albeit a huge one. Closing, on the other hand, is the event that conveys the property. First-timers need to have the funds to make it happen.
When Hopes Are High and Assets Are Low
Underwriters who are responsible to approve or reject home financing applications take pains that borrowers not only can cover the monthly principal, interest and escrows to keep a loan current -- and ultimately pay it off -- they also seek to account for enough cash assets to close the loan transaction. Once an application is submitted, the lender generates a loan estimate which is a fairly close approximation of all the fees and costs associated with the mortgage, including closing costs. So, lenders have a good idea of what borrowers need to close. The approval process determines if they have what they need.
Examples of Closing Costs
Closing costs can be paid to the lender, the seller or a host of third parties like attorneys, title agents, appraisers and county clerks. Some of these actors are paid outside of closing and some collect their fees from proceeds when funds are disbursed. In general, the more of these that have not been pre-paid, the more cash the buyers have to bring. In some instances, the seller may agree to pick up selected fees, relieving the purchaser of the total settlement burden. The bottom line, however, is that unless all parties are properly compensated, the conveyance does not happen.
Closing Cost Assistance for First-Timers
Since home ownership is part and parcel of the American Dream -- and one of the most valuable long-term assets to be held -- there is a public interest in expanding it, especially to younger people. In the public sector, the U.S. Department of Housing and Urban Development (HUD) makes money available to state and local housing commissions for the purpose of assisting first-time buyers with obligations related to real estate settlement. In some cases, allowing higher ratios of loan amount to home value lets buyers focus their limited funds on closing as opposed to down-payments, as with USDA and VA home loans.
The seller concession is another way for buyers avoid a hefty payment due at closing. Under this scenario, the money is taken from the seller's proceeds from the sale; they can be directed to specific fees and charges or simply assume a percentage of the overall costs of closing. Alternatively, the seller might agree to lower the sales price to free up purchaser funds but such a move could raise the loan to home value ratio, in which case the loan might require re-underwriting.
Now and then, a lender might choose to front the closing costs themselves. This is not an act of chivalry, however. In return, the borrower may end up paying a higher rate, meaning a higher monthly remittance. Meanwhile, non-profit organizations like NeighborWorks America, the National Community Reinvestment Coalition and the Neighborhood Assistance Corporation of America are in business to make homeownership more affordable. These groups are worth contacting by prospective first-time home buyers. When all else is bleak, help from family members becomes a most viable option.
