Reducing Your Closing Costs

Closing costs are the costs to acquire a property, apart from the down payment. Closing costs include items such as title insurance, transfer taxes, attorney’s fees, bank loan fees and other costs. “No money down” refers to the down payment, it does not does relate to your closing costs. It certainly does not mean that you went to settlement, signed the documents and became the owner without laying out any cash to the seller.

Do Not Escrow Taxes and Insurance –

Many loans require you to escrow taxes and insurance. This means that the lender has a pool of your money from which it will pay the taxes and insurance premiums as they come due. Usually those items are due once per year.

With an escrow loan, at closing you will often be required to pay into escrow up to 14 months of insurance premiums and a substantial amount for upcoming taxes. In addition, you will usually pay one twelfth of the annual cost of each item with each month’s mortgage payment. When combined with the down payment, moving expenses, fix up expenses, etc. you can have an overwhelming amount of expenses all at one time. If you can eliminate a category of expenses you can defer payment until the bill is due and thus make it easier for you to make closing. If you are flipping the property you may even be avoiding laying out money for an expense you will never incur. Not all mortgage loans require an escrow. When you shop around for a loan, be sure to ask if the lender will waive escrowing the taxes and insurance. If you are using one of my alternative techniques, such as financing with a home equity loan, credit cards, owner financing, lease purchase or other non-conventional source you will usually not be asked to escrow funds.

Get a Real Estate License -

You can use a real estate license to generate the money to pay part or all of your closing costs. It works like this. At closing the seller is typically charged a commission. The broker takes 40-50% of the commission and the agent 50%-60% of the commission. The commission is typically 6% of the sale price. The line item on the HUD-1 settlement sheet will read that
payment is being made by the seller to the broker, which is true. The agent is given a separate check by the broker. This means that you will not usually be asked to disclose that part of money being generated by the sale is being given back to you. You can thus use part of the money to cover your closing costs. If you were purchasing a $250,000 home the commission could be up to $9,000.00. That money could directly reduce the amount you have to come up with to make settlement.

Settle at End of Month –

The time of month during which you close can affect your closing costs. When using a traditional mortgage, part of the closing costs are typically pre-paid mortgage interest. The lender calculates the interest due from the date of settlement to the end of the month and charges that amount of money to you at settlement. If you settle on the first day of the month, you might pay 30 days interest at settlement! If you settled on that same loan at the end of the month, you might only pay a day or two’s worth of interest.

It may also be of interest to you to know that you will have a break until the first regularly scheduled mortgage payment. You do not have a payment due the month following settlement. If you settled on the fifteenth of June, you would pay half a months payment at settlement (to cover your use of the money from June 15-30) and then would not have a payment until August 1. Whether you settled June 1, 15, or 29, you still would not have a regularly scheduled mortgage payment until
August 1. In concrete terms, if you were taking out a $100,000, thirty year mortgage at 5% interest, the daily interest would be $17.89 per day, If you settled on June 1, you would pay 30 days interest in advance at a cost of $536.70, if you settled on June 15, your cost would be $268.35, and if you settled on June 29 your cost would only be $35.78. By just changing the date of settlement to the end of the month you could have saved $500.92 in closing costs!

Write Your Purchase Contract so the Seller Pays Closing Costs –

You can write the purchase contract (sometimes called an Agreement of Sale or Purchase and Sale Contract), which is the contract between you and the seller of real estate so that the seller will pay costs that would normally not be included within the buyer’s mortgage but would instead be a closing cost to the buyer.

The items you should ask the seller to pay include title insurance, appraisal fee, mortgage recording costs, all transfer taxes, all inspection costs, and almost anything else you will have as a closing cost. Ask your lender’s representative in advance of making the purchase contract whether the seller is permitted to pay some of your loan costs such as points and other fees from the lender. You should also ask if the lender will permit the seller to contribute directly to your closing costs in the
form of a credit expressed as a percentage of the purchase price. Sometimes the lender will allow the seller to pay a few percent of the purchase price towards your closing costs.

This method can dramatically reduce your closing costs and thus reduce the amount of money you need to make closing. As discussed above, you may be able to increase the sale price enough to fund the seller’s payment of these items. This will make this contract provision revenue-neutral to the seller (he is getting the same money at the end of the day whether he takes a lower sale price with no seller contribution towards closing costs or a higher sale price with concessions) and once the seller understands that he should not have a problem giving you credit at settlement for the items you want.