Calculating closing costs

Question: We've been saving money and now have enough cash to pay for a small down payment, perhaps 5% or less. How much additional cash will we need for closing costs?

Answer: Mortgage financing is certainly available with 5% down and even less. The VA program allows a zero-down payment for qualified borrowers, while the FHA requires 3.5% upfront for most of the loans it insures.Coming in with 3% down are the HomeReady (Fannie Mae) and Home Possible (Freddie Mac) programs.

While down payment requirements are widely known and understood, many buyers are surprised by closing costs. In many cases, closing costs can amount to more than down payments.

The amount required for closing costs varies significantly, depending on such factors as the property location, transaction size, and negotiations between buyers and sellers.

Closing costs can include a variety of fees and charges. Borrowers can face charges for such costs as loan underwriting, points, title insurance, prepaid homeowners' insurance, prepaid mortgage interest, prepaid property taxes, HOA fees, etc.

However, there's a big difference between down payments and closing costs. Loan programs generally require that down payment money comes directly from borrowers, as gifts from such sources as family and friends, or from down payment assistance programs -DPAs.

Closing costs, however, can be paid by the borrower and from other sources. For instance, many loan programs allow "seller contributions," a credit from owners that can be used to pay buyer closing costs.

These seller contributions can be significant. The VA allows as much as 4% of the purchase price as a seller contribution. Fannie Mae and Freddie Mac are okay with as much as 9% when a big down payment is involved, while the FHA limits concessions to 6%.

Why would owners agree to a seller contribution of any size? After all, call it what you will, seller contributions are just a price discount.

One reason is that if the local market is sufficiently slow, sellers might be better off with a closing credit than a price cut. Redfin estimates that as of October more than a third of all transactions involved seller concessions of some sort.

Another reason concerns ego. The sale price will appear in public records while a seller contribution is just one of many contract terms not likely to be disclosed.

Lastly, it might be easier for buyers to get a price reduction if they call it something else.

In addition to sellers, buyers may be able to get closing cost help from down payment assistance programs because they sometimes cover more than down payments. Also, if the buyer is willing to pay a somewhat higher interest rate, lenders can provide closing credits. If monthly mortgage costs are readily affordable, but big closing costs are a hurdle, a trade with the lender can sometimes be worthwhile.

Speak with local real estate brokers and loan officers for details.