One of the biggest challenges for home buyers today is the increased down payment requirements of many mortgage loan programs. The larger down payment requirements combined with closings costs and the prepaid expenses to establish an escrow account for property taxes and home owners insurance can prohibit many families from purchasing a home.
There is a way to save thousands of dollars and lower your cash required to close if you understand the impact of your down payment & mortgage finaincing on your out-of-pocket closing costs.
The vast majority of home buyers are looking to save money and want the best deal possible. Therefore, they want to offer the lowest price. This seems like it makes the most sense and will save the homebuyer the most money. Let’s look at a specific example to see the actual impact of this choice and how much this strategy lowers the buyers overall closing costs.
The home buyer has a limited amount of cash available for the down payment and closing costs. Therefore, the home buyer is planning on making a 5% down payment. The remaining 95% of the sales price will be financed.
Let’s presume an asking price of $200,000 and the home buyer wants to make an offer of only $195,000 on the home. The buyer thinks they are saving themselves $5,000. Did they? What do you think?
You can only answer this question by looking at the specific percentages of the down payment and financing percentages. The home buyer is only providing 5% of the funds to purchase the home and the lender is providing 95% of the funds. Therefore a $5,000 down payment only lowers the buyers closing costs by $250 ($5,000 x5%= $250).
Here is another idea to consider that will dramatically lower the buyers closing costs for the same amount of money. As opposed to a price reduction the home buyer could ask the seller to provide them with a closing costs credit of $5,000 and make an offer of $200,000. What is the impact of this option? A $5,000 closing costs allowance will save the home buyer $5,000 in out-of-pocket closing costs.
What would you rather save as a home buyer $250 or $5,000? For many people this may be the difference in them purchasing a home. This strategy can be especially helpful for first time home buyers.
*The lending guidelines for seller paid closing costs can vary based on the amount of your down payment and the loan program you select. Therefore, consult with a mortgage lender. The mortgage lender can provide more information based on your particular situation. In addition, your Realtor can provide additional input and guidance on how to properly structure your offer.
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