Closing costs

those involved with the home sale (such as your lender for processing the loan, the title company for handling the paperwork, a surveyor, local government offices for recording the deed, etc.). The amount varies, but could be, say, $6000 on a $130,000 house. The range is all over the map -- from 1 to 8% of the price of the home, though more typically 2-3%. These costs are significant -- especially after you've already had to come up with a lot of cash for the down payment.

Your lender will give you a more accurate estimate of closing costs on the purchase of a particular house you've selected.  This is called a "Good Faith Estimate". If they don't give it to you, ask for it.

Tip: Make sure to get the Good Faith Estimate (GFE) from your Lender. Review it and compare it to the typical closing costs listed at Yahoo. Direct any questions about it to your lender and your realtor.

Tip: Roll in the closing costs into the mortgage. If you don't have enough cash to pay the closing costs, you can often get the closing costs added to the amount of the loan. For example, if the loan amount is for $150,000, and the closing costs are $4500, you'd add the closing costs to the loan amount so you'd actually be borrowing $154,500 total. This is handy if you're short on cash after making your down payment.

You need two things to be able to roll in your closing costs like this. First, you have to qualify for the bigger loan. If the bank will only loan you $150,000 from our earlier example and not a penny more, then you've already hit the maximum they're willing to loan. But don't get discouraged, because it's usually not a problem to get the bank to loan you a few thousand extra dollars extra.

The second thing is that the new loan amount can't exceed what's called the Loan-To-Value ratio (LTV), which is the amount of the loan compared to the to the value of the house, based on the appraisal. In simple terms, let's say the house is worth $100,000, and the bank will loan up to a 95% LTV, meaning they'll loan you up to $95,000. If your credit isn't so good then the bank might only loan up to an 80% LTV, meaning they'll loan you only $80,000.

Don't confuse the price of the house with the value of the house. The bank gets the value of the house -- what they think the house is worth -- from the appraisal, which is a report prepared by a professional which estimates the value of the house. The selling price could be higher or lower than the appraised value.

Okay, so the point of all this is, if you roll the closing costs into the mortgage, the new loan amount can't exceed your LTV. If the LTV amount was $120,000, and the $4000 closing costs would push the loan amount from $118,000 to $122,000, then the bank won't let you roll in the closing costs. You could get around this by making a larger down payment, so you don't have to borrow as much money from the bank, but if you have the extra money for the bigger down payment then you also have the extra money to just pay that money towards the closing costs instead of rolling them into the mortgage in the first place.

One way of rolling the closing costs into the mortgage is to have a seller concession. It's a little complicated so I recommend you just ask the lender if you can roll the closing costs into the mortgage the easy way. The lender might require that you use the seller concession method, though. If you have to go that route, the way it works is that you and the seller say that the sale price will be about 6% more than the price you agreed on, and then the seller "gives" you that extra 6% that you paid. For example, let's say the price was $100,000 and you're putting 10% down, or $10,000, so you're getting a loan for $90,000. You and the seller decide to go the seller concession route, so you agree that the price should be 6% more, or $106,000. That means you'll now put $10,600 down and get a loan for $95,400. See what happened? You got a loan for $5,400 more than the original loan. That's what you use to pay the closing costs. The seller doesn't keep the extra money because part of the deal is that (s)he gives that extra money back to you at closing.

Tip: Ask the seller to pay some of the closing costs. If you're short on cash for the closing costs and can't roll the closing costs into the mortgage, ask the seller if they're willing to pay part of the closing costs. It's not unusual for buyers to ask for this. Usually the worst that can happen is that they say no.

Tip: Get the lender to pay the closing costs. If you're short on cash for the closing costs and can't roll the closing costs into the mortgage, some lenders will pay part or all of the closing costs, but in exchange you'll have to pay a higher interest rate on the loan, perhaps 0.25% or 0.50% higher. Ask your lender if this is an option if you need it.