Cash Requirements & Closing Costs
Frequently Asked Questions about Mortgage Financing, Cash & Closing Costs
Even if you get a no closing cost loan, you'll probably still have to come up with some money before you close your loan. Here are the answers to some common questions involving cash needed for your down payment, closing costs, and what you'll need to do to make sure you have the money you need at the closing table.
1. What is the difference between down payment and cash needed to close the transaction?
The down payment is less than the total cash needed. Other items to be paid include the closing costs, the discount points, the real estate taxes, the insurance premiums, the interest for the month in which the closing occurs, and several lesser fees.
2. What are "closing costs"?
The "closing" or the "close of escrow" is the last stage in the transfer of title of real property from one person (or persons) to another. A loan may be needed to buy the property. In most cases, whether or not a loan is used to buy the property, the closing is administered by an independent, reliable third party and there are fees to be paid for services. These non-reoccurring fees associated with closing are called closing costs. It does NOT include all costs needed to complete the transaction.
Closing costs do not include down payment, real estate taxes, insurance fees, and several other expenses.
3. Can closing costs be zero dollars?
It can be made to appear that way, but please keep in mind that there is no free lunch. An example: The largest portion of closing costs is the origination fee to the Mortgage Counselor's company. This fee can be paid in cash, can be included in other expenses, or paid as a slightly higher interest rate. It is really only zero if the Mortgage Counselor loves you.
4. I need $12,300 for closing. I have $6,000, and my wife's mother is going to loan me the other $6,300 at no interest for 4 years. Do I need to document that transaction?
A gift from a parent, or other immediate family member is an acceptable form of down payment in most cases. A loan is only acceptable if there is appraised collateral for the note. Usually, a personal loan is not an acceptable form of down payment. A gift is OK, usually.
Take-home lesson: the guidelines are not logical from the borrower's point of view. Do not try to use guessing as a method of setting a strategy. Ask your Mortgage Counselor.
5. My cash for closing is in a safety deposit box. Is that a problem?
Probably. Although it may appear to be strange, cash is not usually an acceptable form of funds to close when a loan from a financial institution is also needed. However, there are several loans that allow cash with no paper trail. These loans require a down payment of at least 20% of the purchase price.
6. The house appraises for $245,000 and I have a contract to purchase it for $198,000. Can I get a loan for 95% of the appraised value?
Not a chance. Loans from financial institutions and many private investors will base the loan amount on a percentage of the contract price or the appraised value, whichever is lower. If you bought it for $198,000, then its worth $198,000.
7. What can I do if I don't think I have enough cash?
A competent mortgage counselor can help guide the most prudent use of resources. An example of a typical question is whether to pay off credit cards or save the cash for a down payment. Since there are many aspects to each person's financial situation, not all decisions can be categorized and displayed in a table. A competent mortgage counselor is a valuable resource in such situations.