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How Can Closing Credits Reduce My Out-Of-Pocket Expenses When Buying A Home?

Buying a home is one of the biggest (and emotionally charged) investments a person can make in their lifetime. It can also be a significant financial burden, with upfront expenses such as down payments, closing costs, repairs, and moving expenses. 

For hopeful homeowners in the Chicagoland area, closing credits can be an effective way to reduce out-of-pocket expenses when purchasing a home.

Also known as sales concessions, seller-paid costs, down-payment assistance, or lender credits, these are funds that a seller or other connected party contributes to purchase or as funds toward needed repairs and closing costs. These credits can go toward appraisal, title search fees, loan origination charges, property taxes, and more.

The amount a seller can offer varies depending on the type of loan but typically ranges from 3% to 6% of the purchase price. It can significantly reduce the amount of cash a buyer needs to bring to the table, making homeownership more accessible to those who may not have enough funds upfront.

Let’s take a closer look at how these contributions can help prospective buyers become happy homeowners more affordably.

Finding Funding

While no one is eager to repeat the sub-prime mortgage loan fiasco of 2006-2007 that led to the Great Recession of 2008 and millions of owners finding themselves underwater, changes to credit score rubrics and new loan products are making it easier for consumers to realize their goal of owning a home.

If your credit score is above 580 or so, you have a reasonable debt-to-income ratio, and steady, verifiable income, an experienced and insightful home loan expert can help you explore all available options and find the perfect mortgage for your needs.

The first thing you need to do is take a deep dive into your financial situation and determine how much house you can afford — and how much you’ll most likely need to have on hand for closing day.

Typically, closing costs can range from 2% to 5% of the home’s purchase price. For example, if you’re purchasing a $300K home, you may be looking at closing costs of anywhere from $6,000 to $15,000. Having to throw down this much cash can be prohibitive for people tired of renting.

Funds for the myriad of costs associated with buying a house can come from a variety of sources. Those include:

  • Personal funds (checking, savings, other asset accounts, including your retirement funds)
  • Gift funds (typically money from a family member; most come with a “gift letter” for your lender)
  • Down payment assistance programs
  • Seller credits (which may result in a slightly larger loan)
  • Lender credit (sometimes known as discount points), which lower closing costs in exchange for accepting a higher interest rate

Concessions in the form of closing credits benefit both parties involved in the transaction. It’s best to partner with a real estate broker with keen negotiation skills who can help you maximize seller contributions your lender allows.

Success in a Seller’s Market

The Chicagoland housing market remains strong as the Midwest increases in popularity and there’s a limited amount of inventory, but motivated sellers are still offering closing credits and other perks to sweeten the deal. There’s also less competition these days due to higher interest rates, leading many real estate pros to tell their clients to “marry the house and date the rate.”

Getting the home of your dreams is all about having your ducks in a row financially, doing your research, and working with an experienced real estate broker and mortgage lender. These experts can help you make an emotional connection with the seller and find the right leverage to seal the deal.

It’s also vital to come prepared with a mortgage preapproval letter. This shows the seller that you mean business and can proceed quickly. You may also want to look for homes listed under your budget so you can bid up if needed. 

When setting your home-buying budget, don’t forget to consider all of the “invisible” costs that pop up along the way, such as various fees, insurance premiums, inspections, surveys, moving, commissions, and repairs. Even with closing credits, it’s vital to know exactly how much you can afford so you don’t find yourself overextended. 

Sellers who are offering concessions, closing credits, or other incentives might be doing so because their property needs work. That’s why it’s crucial to always get a home inspection performed by a licensed professional. Their report will guide you through determining if the amount offered as an incentive by the seller is worth what you’ll have to spend to get the home to your standards.

No Time Like the Present

Chicago and the surrounding areas are actually quite affordable when compared to the Northeast, California, and the emerging Sun Belt tech hubs. Our housing market is exceptionally stable, job growth is good, and the cost of living is relatively low. There’s also more available housing now than there was in January of 2022.

It’s not a bad time to buy at all, and it’s better when you partner with a mortgage loan broker who’s knowledgeable about our unique market, the real estate industry, and the available loan products and opportunities for first-time home buyers.
Seize the day and find the home you’ve always wanted — reach out today!

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