Can’t Cover Mortgage Closing Costs?

When you are purchasing a home, most people know that you need to have saved up a down payment (minimum 5%).

What are closing costs?

In addition to the down payment, you also need to have saved up enough money to cover the closing costs. What are closing costs? Closing costs are expenses such as lawyer fees, title insurance, land transfer tax, etc. We usually estimate these fees at 1.5% of the purchase price.

How To Estimate Closing Costs

So if you were purchasing a home for $800K, we would estimate your closing costs at 1.5% x $800K = $12K.

Total Savings Needed

If you are putting the minimum down on this home, that means 5% of the first $500K = $25K, and 10% of the remaining $300K = $30K so minimum $55K on this $800K purchase.

That means you need to have a total of $67K in savings. That’s a lot of dough! The good news is that if your income is sufficient, you can actually borrow money to cover the $12K closing costs. It’s called factoring the closing costs into the ratios (debt ratios).

Factoring Closing Costs Into Ratios

Here’s how it works: you take the total estimated closing costs ($12K in this case) and you multiply it by the mortgage rate. Let’s say the rate is 2%. $12K x 1.02 = $12,240. Divide this number by 12 (months in the year) = $1020. The bank will consider that you are paying an additional $1020/mth in debt and then check if you qualify for the mortgage with this additional liability. If you do and you can afford it, then you do not need to have the closing costs saved. You can actually borrow from unsecured loan(s) to cover the closing costs.