When I sit down with a new client, one of the first things I do is go over what exactly it costs to buy a home. Sure, you probably know you need a down payment of some amount (I never recommend putting down less than 3% on a home purchase, by the way), but are you prepared for the additional costs of inspections? What about closing costs? Aside from your down payment, closings costs are typically the biggest expense of your home purchase. Many people mistakenly thing closing costs are part of your down payment, but unfortunately they're not! I learned this the hard way. When I bought my first house, I had all my savings ready to go for my downpayment, but neither my lender, nor my agent explicitly prepared me for the "bill" I would receive at closing. Three days before closing, I saw a whopping $5000 charge, that I was not expecting, and I had to dip into my emergency fund to pay it. I never want something like that to happen to any of my clients so I like to make sure we outline the costs up front and throughout the transaction.
What are closing costs? Closing costs are usually made up of a variety of fees from the lender, your closing attorney, and taxes or HOA dues. It's common for a lender to require you to pre-pay taxes or HOA dues, and lenders have their own fees for actually giving you the loan. Wondering if what your lender is charging you is fair or normal? Your Realtor® is the best person to ask. We see loans all the time, and can often tell you when you're overpaying.
How much are closing costs?
Commonly, a buyer's closing costs will fall somewhere in the range of $4000-$5000.
What if I can't afford to pay closing costs?
For buyers who may be lower in cash reserves, a common practice is "finance" your closing costs. Let's say a house is listed for $250,000. You have enough for the down payment and inspections, but that's it! How do you make it work? Depending on how competitive your market is, a common practice may be to offer $255,000 to the sellers and ask for $5000 in closing costs. This way, the seller is netting $250,000 like they hoped, and will pay the closing costs out of their cash proceeds from closing.
Here's a helpful video from the National Association of Realtors® explaining closing costs.