Closing Costs and Financing Incentives
When it comes to large purchases it usually works out that the asking price is just the tip of the iceberg in terms of the overall cost of the item. This is especially true when it comes to homeownership.
One of the many, possibly unexpected, expenses incurred by homebuyers when they go through the process of purchasing real estate are the closing costs.
What Are Closing Costs
Closing costs are expenses encountered by all buyers and sellers when they go through the process of transferring ownership of a property. Closing costs are over and above the price of the property and they normally include an attorneys fee, taxes, an origination fee, an amount placed in escrow, and charges for obtaining title insurance and a survey.
Closing costs will differ depending on where you live in the country but most lenders and real estate agents are able provide estimates of what these costs will be to prospective homebuyers. Usually closing costs end up being between two and six percent of the mortgage amount.
With down payments, mortgage payments, insurance, renovation costs, closing costs and the host of other expenses homeowners have to consider many prospective homebuyers become intimidated and frightened off by the long list of charges that they will incur. These people often begin to think that if they do invest in a new home, they may never be able to do, or invest in, anything else because their home will absorb all of their income. These are the types of people who will continue renting for years not realizing that there are options for people who have low incomes, little savings and will be first time homeowners.
One financing incentive that some people take advantage of is having sellers pay for closing costs that can put a sizable dent in any bank account. Not all sellers will agree to this, but it's worth your while to inquire about it because if the person wants to sell their house bad enough they may agree.
Banks and financial institutions have also begun to offer financial incentives to new homeowners and prospective homebuyers with below average incomes.
Financing Incentive Programs for Homebuyers:
- Low Down Payment Mortgages
- Low Interest Mortgages
- First-Time Homeowner Programs
- Location-specific financial incentives
Financial incentives for homebuyers come in a variety of forms, but the most commonly used are low down payment mortgages. These mortgages offer homebuyers the opportunity to pay down payments as low as 3 percent of the purchase price of their homes.
Low down payment mortgages can be, for many people, the only affordable way to invest in a home. This is because conventional mortgage down payments are 20% of the purchase price of the house and in almost all cases this means a payment in cash of more than ten thousand dollars.
With the low down payment mortgage incentive the homebuyer is usually expected to get mortgage insurance to offer security to their lenders in case they default and miss payments. If a homeowner does default and their home goes into foreclosure the homeowner will likely lose their home and any money that they have put into it but the lender will be reimbursed for any money that they are owed by the borrower by way of the insurer.
Usually mortgage insurance is paid off either annually, monthly or all at once with one single large payment.
The second financing incentive option available to homebuyers who cannot afford conventional mortgages is the low interest mortgage. Low interest mortgages can generally be obtained through banks and financial institutions when the economy slows down, but some of these banks and institutions will have low interest mortgage programs in place no matter what the economy is like.
Low interest mortgage programs typically have the following characteristics:
- They are usually offered mainly to first-time homebuyers
- They have a fixed interest rate
- They require a down payment of between 3% and 5% of the home's purchase price
- They tend to last 20-30 years
- They can cover up to 97% of the houses purchase price
Keep in mind that each low interest mortgage program will differ slightly so it's important to talk to a variety of lenders to see which sort of program will be best suited to someone in your particular financial situation.
Many banks and financial institutions will offer special programs for first-time homeowners to take advantage of. Some states also have programs in place to help out first-time homeowners like offering them thousands of dollars in tax credits.
Some companies will offer help to employees who are first-time homeowners by way of grants and other incentives and some community groups may also offer programs and financing for first-time buyers. In addition the federal government has established special programs for teachers and police officers who are buying their first home so if you are in the market for a new place and it will be your first, it's worth taking the time to evaluate the options that are available in your area.
Financing incentives are also available from some states if you choose to buy a home in an area that they are trying to promote or revitalize. An example of this is Chicago's 'location efficient mortgage' or LEM.
LEM Program
The LEM program is offered to anyone who has good credit, regardless of income, as long as theyre willing to live near public transportation. When a borrower is on the LEM program lenders are able to quantify the transportation savings of their household and stretch the borrowers standard debt-to-income ratio.
Programs such as this allow people who are normally rejected for conventional mortgages access money they desperately need for financing. The key to taking advantage of all possible financing incentives is to do some research to see what you qualify for and to be prepared to negotiate with the person who is selling the house you have your eye on.
Many people see homeownership and its many financial hurdles as too much too handle, but there are endless resources available these days for these people who see homeownership as out of reach.
Talk to lenders, real estate agents, your employer as well representatives at community and government organizations and you will see that many of these people have options to help you get into a home of your own.
Down payments and closing costs may seem like great hurdles to overcome but when you are driven to buy there are many ways to overcome these financial obstacles.
