How can you roll in your closing costs to your purchase mortgage?
One question I often get from buyers is, “Can we roll our closing costs into the loan?” This often will make or break a deal, particularly when one is facing a 1-2 percent transfer tax on top of typical loan closing costs.
The answer is, it depends and if you can, kind of. Mortgage loan rates are based on loan-to-value somewhat, the higher the loan-to-value the higher the rate. In addition, if one goes over 80 percent loan-to-value, then there will generally be mortgage insurance. It’s best to put down at least 20 percent if you can swing it, but if you can’t, then you may still get a mortgage, it will just cost more.
In general, the loan-to-value is calculated off the purchase price, and in general buyers are expected to bring their down payment, closing costs and funds for opening escrows for taxes and insurance. In addition, you will probably have to pay the first years hazard insurance premium in advance. If it is your obligation to pay the transfer tax, you will bring that.
But there may be a way in many instances to roll in the closing costs, escrows and transfer tax into the purchase price and just bring the 20 percent. This is called seller paid closing costs, and usually a seller can contribute up to 6 percent of the sales price toward the buyers closing costs.
Let’s look at an example. Assume that you found a nifty little place to buy for $400,000 and you have the 20 percent ($80,000) to put down. But there is a town of Avon $8,000 transfer tax, $2,000 in closing costs and $3,500 in prepaids for escrows. So, instead of bringing your hard earned $80,000 to the table, you have to bring $93,500. And you’re a bit short this week and all you have in the bank is $85,000.00. And if you added the extra $13,500 to your loan amount you would require mortgage insurance that would add $89 per month to your payment. That makes that extra $13,500 cost you an extra $996 per year, which is neither principal or interest. In addition, your rate may go up about 1⁄8 percent. What to do?
What you can do is offer the seller $413,500 and ask the seller to pay the transfer tax of $8,000 and give you, the buyer, a credit toward closing costs $5,500. You then apply for an 80 percent loan in the amount of $330,800 and bring 20 percent of the purchase price of $82,700 to the table and you are good to go!
In the end, the seller walks with exactly the same amount of money, and you, oh wise homebuyer, have leveraged 80 percent of your closing costs into your loan amount and avoided the mortgage insurance. That’s what is called smart thinking!
The one caveat to this is that the appraisal has to come in at the higher price, and that is not always a given these days. Appraisers do read the contracts (at least they are supposed to) and they will catch the seller concession for the $13,500 and take that into consideration as to whether you are really paying fair market value. If the appraisal comes in lower, then the borrower will either have to come up with more cash or bite the bullet and take the mortgage insurance.
Mortgage insurance generally can be removed eventually, but when is always negotiable, and it is always at the lenders discretion, but in general when your loan is paid to 78 percent of the purchase price, and a new appraisal (which you pay for) shows no decrease in value and you have been making payments for at least 12 months, you stand an excellent chance of getting the insurance payment dropped.
There are many “tricks to the trade” of getting buyers in homes. You need a good team advising you or a Realtor and a lender to guide you through the process and help you evaluate different scenarios.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers.