Closing Costs and Reserves – They Exist and They’re Annoying

Many of us save for the down payment and set a budget for our monthly mortgages, but closing costs and reserves can surprise first-time homebuyers. They feel sneaky. But the good news is that you’re here! And knowing about both will help you determine if you’ve saved enough to afford the home of your dreams.
What are closing costs?
When the title of your home is officially transferred over to you, you’ll pay fees associated with the real estate transaction; it’s time for all the parties and people involved to get paid for closing the deal on your home, so to speak. Closing costs can be hefty, ranging anywhere from 1-5% of the cost of your home depending on the state in which you live. That seems like a small percentage, but it can mean $5,000 – $25,000 on a $500,000 home.
When will closing costs first show up & how can I lower them?
When you apply for a home loan, your bank is required to provide an estimate of the closing costs and it’s important that you know how much is expected because you’ll be required to pay this in addition to your down payment. Be sure to review the estimate, ask questions and do some research about each cost to see what you can get reduced. The Consumer Financial Protection Bureau has guides to help you examine the closing costs so you feel confident that you’re getting a fair deal.
Some common ways to reduce costs include:
  • Negotiating with the seller to pay some of the closing costs
  • Negotiating with your loan officer to reduce the bank’s fees
  • Delaying your closing date until the end of the month
  • Not buying points when interest rates are low
What about reserves?
In addition to the down payment and closing costs, you may also need to consider reserves when you apply for a home loan. Reserves are sources of cash that you’ll have left after you close on your home. Banks want to see that you haven’t drained all of your accounts to fund your down payment and closing costs, just in case you get into a pinch, like losing your job. In addition, you might personally want to have cash reserves for your own reasons, like buying furniture or making small improvements.

 

Many first-time homebuyers like to have 6 months of mortgage payments saved, it just depends on your comfort level when you purchase.

 

The bank or your lender may require that you have more cash in reserves if they feel that part of your home loan application is weak. They’ll review the balances in your checking, savings, investment and retirement accounts to determine how many monthly mortgage payments you’d be able to pay from these sources of quick cash.  For example, if your mortgage payment is $1,800 month, and the lender requires that you have reserves for two months, you’ll need $3,600 after closing.
How do I calculate my reserves?
Unfortunately, there isn’t a one size fits all calculator for determining how much you should have in reserves. That’d be great! In reality, reserve requirements vary bank by bank, mortgage by mortgage. They depend on your loan type, credit score, and how much down payment you put towards your home. Lower credit scores and small down payments may result in higher reserve requirements. But again, it depends on your bank.
Loftium can help!
By using Loftium’s down payment, rather than draining your savings, you get the comfort of having an extra cash cushion after buying your first home. Get a quote on a home you love, today.
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