Buyers Can’t “Roll Closing Costs” Into Their Loan; Options?

roll closing costs into loanTotal closing costs for a purchase transaction can vary from $5,000 to $30,000, depending on purchase price, loan amount, type of loan, month of the transaction and location of the transaction.

This is b/c closing costs include not only the standard title, escrow, appraisal, underwriting fees, etc.; closing costs also include prepaid interest and property taxes, and these costs can be substantial when an impound or escrow account is required or requested. Reminder: An impound account is set up and funded at close of escrow when property tax and insurance payments are made on a monthly pro-rata basis with the mortgage payment.

FHA Loans require an impound account, as most people know, and if the purchase is large and closing in August (when 8 months of property taxes need to be collected at close of escrow to pad the impound account), the impound account alone can be as large as $7,500.

Transfer Taxes are another major fee that are location specific depending on an area’s practices and the size of the transfer taxes. The City of Oakland charges 1.5%, for example, and this is split between the buyer and seller. For a $700,000 purchase, a buyer will usually have to pay $5,250 in transfer taxes.

For buyers tight on cash, below are three options to help cover closing costs. Please note, however, that none of the options include “rolling closing costs” into the loan, as that is now allowed.

1. Make a smaller down payment. This can result in a higher interest rate or mortgage insurance, so it is not always a viable option.

2. Get a lender credit. This is not a “free lunch” either, as lender credits usually require higher interest rates. This is b/c lenders need to push up the rate in order to garner more yield premium or commission to share with the borrowers in the form of a closing cost credit.

3. Get a seller credit. This was a great option … in 2009. In today’s competitive markets, however, sellers are reluctant to accept offers with seller credits.

The key for all of this is to make sure that the buyers have accurate closing cost estimates during the pre-approval process, so they are not caught off guard when they see a $20,000 closing cost bill (instead of $7,000 bill). It is essential that lenders know where the buyer is looking for properties and when the buyer is likely to close, and that lenders know all the practices for different areas.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 01524255, NMLS# 335646