At this point, you are getting close to the finish line. However, there are still things to be aware of in this last phase, because the closing process, similar to some of these other steps, has its own set of terms and concepts that may be unfamiliar to you. For starters, first-time home buyers often wonder if they use money from a relative to help them pay for their closing costs. Let’s take a look at some of the issues around gifts.
Gifts to help you fund your mortgage closing
- Who can provide gift funds toward closing? How does that work? Gift funds can be used for closing costs. There are some rules you must follow in regards to who can give you funds and how much they can give you.
- You can receive gift funds from:
- A family member or close relative
- A friend
- A government program
- Your employer
- Charitable organizations
- A public assistance program
- The amount that you can receive depends on the type of loan your loan type.
- If you are getting a conventional loan and putting 20% down, all 20% of the down payment can be gifted to you. However, if you are putting less than 20% down, you must pay 5% of the purchase price out of pocket.
- FHA and VA loans also have certain rules about gift funds. If your credit score is above 620, your entire down payment can be paid with gifted funds. But if your credit score is lower, you are responsible for paying at least 3.5% of the down payment.
- All gifted funds must be accompanied by a gift letter, explaining who is giving the gift, how long they’ve known you, that the funds are not to be paid back, and the date the funds were transferred.
- If you have time to “season” the funds, meaning the money is in your checking or savings account for more than 60 days, lenders don’t usually question where the money came from for the closing costs.
- Lastly, the amount you can receive as a gift matters toward the taxes of the person giving the gift. Parents who give to their children can give up to $15,000 ($30,000 if the parents go in together), and the parents jointly file their taxes. There are exceptions, so consult with your tax advisor to help understand the implications.
- There are closing and down payment assistance programs that can also help you cover your closing costs. Your mortgage advisor can help you evaluate these programs.
Keep this in mind about loans and your final costs: “100% financing” does not equal “no money out of pocket”. This is a common misconception among home buyers. You may have seen an ad that claims you can get a loan with no money down. What “100% financing” means is that the loan amount is for 100% of the purchase price of the home, and you are not putting down a down payment. However, there are still closing costs to consider.
- For example, for a $200,000 house, you still have to cover about $6 or $7k in closing costs, which are not normally covered by the loan amount.
- Closing costs are going to vary depending on the state and county where you are buying a house. We will break those down in the Closing and Title section.
- There are programs that allow you to finance the closing costs. These programs could use forgivable loans or grants provided by your state or local government. Most states and many counties offer assistance programs to residents to help with their down payments or closing costs. Most of these programs are for first-time homebuyers, but that term is often loosely defined as a buyer who has not owned a home in the past three years.
To take advantage of these programs, typically you’ll need to follow a set of guidelines:
- You’ll need to take a HUD-approved “housing counseling” class. This may seem like a waste of time upfront, but if the certificate of completion earns you a grant, it is well worth it.
- You may have income requirements you’ll need to meet.
- You will need to purchase in an approved location.
- You will need to stay below a maximum purchase price.
- You will need to put some money toward the purchase.
While grants and down payment assistance can be applied for, this is an excellent opportunity to have your mortgage advisor review your financial situation and help you pick the programs that you’ll benefit from the most. Jumping into any financial commitment, even one that appears to be “free”, can harm your overall financial position. An experienced mortgage advisor will have helped many homeowners navigate this process.
- Once you find a property, how long does it take to close? The home buying process can take anywhere from 30 days to 60 days. Here are some of the things that take place during this time.
- Once your offer is accepted by the seller, work with your Realtor and your mortgage advisor to pick a closing and title company. They will start the background check on the property (we will talk more about this in the Closing and Title section below). At this point the title company will go through any documents related to the property you are interested in buying, making sure the title is “free and clear” to transfer.
- Your Realtor will also work with your mortgage advisor to start the process of final approval or your mortgage.
- You will also work with your Realtor and mortgage advisor to set up any home inspections and any necessary walkthroughs to help facilitate the purchase.
- How long until I can move in? Normally, you can move in on the day of closing. The only reason you would not be able to move in would be if you and the seller agreed to some other date for occupancy during the purchase negotiation.
Closing and Title
The closing and title company is another of your partners in the home buying process. Working with the title company is your final defense to protect you from fraud, scammers, and sellers who may not be completely forthcoming. Let’s dig into what the closing and title company does and how they help home buyers and sellers.
- What is a title company? A title company is disinterested third party that protects all parties in a real estate transaction; buyer, seller, insurance, and mortgage company.
- What is a title company’s purpose? A title company reviews the title, issues insurance policies, facilitates closings, and files and records paperwork with the county government.
- It is a buyer’s choice to pick a title company; however, your Realtor or mortgage advisor can recommend one if you aren’t sure.
- What is the title? A title is a deed for the property. A deed of ownership is the document that shows all the details of a property. This includes who owns it, who has a lien against it (if anyone). A lien is a right granted by a property owner to another party that sensors payment of a debt. This means your mortgage loan will be a lien on your property, which will be included on the deed of ownership. The tax description and tax id of the parcel are also on the deed.
- What is title insurance? Title insurance is a type of insurance policy that protects the holder of the policy from financial loss related to problems with the title to a property. Your mortgage lender will get title insurance, a temporary insurance policy that protects the lender from the loss of claims filed against the property. The most common claims filed against a title are back taxes that had been missed by a title company, liens (from mortgage loans, home equity lines of credit, easements, contractors), and conflicting wills. There is also owner’s title insurance, which protects the property owner.
- What happens if I am absent for closing? Unfortunately, if you missed your closing date and didn’t call to reschedule it in advance or have a power of attorney in place to sign for you, the closing will be delayed or could result in a failed deal. By executing a Power of Attorney (POA) correctly, you can have another party sign for you at closing. There are quite a lot of rules governing Power of Attorney, so speak with your mortgage advisor and your title company for advice.
- Can things pop up at the closing table? Closing isn’t always straightforward. Unexpected things can happen, so you’ll want to stay flexible. The county or local government could process a bill for the property. The utility company could come up with a last-minute bill. A construction contractor could file a last-minute lien against the property. In any event, strange things can and do happen. Your best course of action is to work with all parties as best you can to close the purchase on time.
- What is a closing disclosure? A closing disclosure is a document prepared by the title company. It explains the mortgage you’ve chosen and all the details of that mortgage. This includes your monthly payments all broken down into principal, interest, taxes, and insurance (PITI), HOA fees, and any other costs rolled into your mortgage. You will receive the initial closing disclosure at least three days before closing. By law, you must open and review the disclosure, but you don’t have to sign it. Contact your mortgage advisor with any questions.
- A closing disclosure is not final until you sign. Many closings have been held up due to last-minute bills and liens against the property. Your closing disclosure is only final when you sign the paperwork.
- What do all the fees on the closing statement mean? Depending on the state you live in and any local fees for transferring real estate and the type of loan you get, there are any number of fees that go into your closing costs when you buy and sell a house. Please look at our mortgage glossary for an explanation of some of the fees that could be on a Closing Settlement Statement. The title company will explain these fees at the closing table. If your mortgage advisor or Realtor is present at closing, they can also help explain the costs. Ask questions if anything is unclear.