One of the biggest obstacles to buying a home is having enough money for the down payment and closing costs. The down payment is pretty straightforward. It is the difference between the purchase price and the amount of the mortgage. Depending on the loan program minimum down payments can vary from 0% down to 20% down. The most common programs that don’t have income or other qualifying limitations are FHA and conventional where down payments of 3.5% and 5% of the purchase price are required.
Surprisingly, the down payment is usually less of an obstacle than the closing costs that can easily total several times the down payment. People often wonder how closing costs can end up being so much and can vary so widely from one home to another. The quick answer is, property taxes. They will usually total close to a year’s worth of taxes needed at closing. That is because property taxes in PA are paid for the year in advance. So at closing, the buyer needs to do two things concerning the taxes 1. The buyer needs to reimburse the owner for the taxes paid on the property for the time the new buyer is going to own it and 2. the buyer also needs to set up an escrow account for the taxes that will be due the coming year on the home. Usually the total of those two items will equal one years’ worth of taxes.
For example, if the school taxes are paid up until June 30 of the current year and the closing will occur on April 1, the new owner will reimburse the seller for the taxes from April 1 until June 30. The same thing will occur for the county taxes that are paid until December 31. The new owner will reimburse the seller from April 1 until December 31. The buyer will need to set up an escrow account so that there will be enough money in the account to pay the new tax bills that will be coming out during the year. The closing agent will calculate how much needs to be paid back to the seller and the lender will calculate how much needs to be put into the escrow account so that when 1/12th of the taxes is put into the account each month there will be enough money to pay the bills. It doesn’t matter when (during the year) you close, the total of those two items will come to very close to one year’s worth of taxes.
When you add the PA transfer tax (which is 2% of the purchase price of the home), title insurance, appraisal and lender’s and recording fees you get a number that usually is about 6% or so of the sales price. If there are Homeowners’ Association fees those would be added to that total as well. The good news is, you can get some help with the closing costs. Depending on the program, the seller can pay up to 6% of the sales price towards the closing costs (referred to as a “sellers assist”). In most cases that would cover virtually all of the costs. That contribution would have to be made part of the agreement so plan ahead when making an offer if you need some help paying the closing costs. Adding in that contribution will make the seller less flexible on the price but it can be worth it to make the transaction work.