0% Down Does Not Mean $0 at Closing

Kristen Ambos: Hey everyone and welcome to the Always On Point podcast. Here with Kristen Ambos, sponsored by my parent company, Point Mortgage.

So, I want to talk today to you because people hear 0% down and they think they need absolutely no money, like $0 into it. And while there are some options with down payment assistance and things like that, I want to go over today the true money you're going to need to get into a house.

Now, if you happen to get some down payment assistance or something like that in addition to, great! But so many times, your earnest money, setting up an escrow account, homeowner's insurance, all of the things, gets very confusing, and people just don't understand what's all entailed with those closing costs and setting up those prepaid items, prepaid interest, and things like that, that go into that final figure that's due at closing.

So, in this episode, we're going to assume there's no additional down payment assistance. And yes, you might have a 0%, I'm sorry, a zero-money loan like a USDA with no money down. USDA offers a potential no money down, and things of that nature, VA. But there's always those costs that go above and beyond it.

And if you are putting money down, let's say you're, you know, we'll just easy numbers, $100,000 loan amount purchase price, you're putting no money down, which would be $0. What costs go into that?

The other part of that is people will say, "Well, what are my closing costs if I'm buying a $500,000 home?" Well, crazy enough, your closing costs here in Wisconsin are the same amount if you buy a $500,000 home or if you buy a $100,000 home, because it's actual third-party fees that go into this.

So, there's not a real discrepancy on purchase price most of, or loan amount. Most of that is because in Wisconsin, our title insurance is the same amount of money. So, there's not an adjustment for an increased loan amount or increased purchase price when it comes to closing costs.

So, even if you're putting no money down, here is exactly what you need as far as costs are concerned, out-of-pocket, true cost, third-party fees, that you may have to bring into the table.

So, first things first, let me talk about earnest money. Earnest money is good faith money upon an accepted offer. Most times, I'm seeing earnest money of somewhere around 1%. So, let me go off of that.

So, let's say you're buying a $300,000 home. 1% would be $3,000 of earnest money. Again, that earnest money is good faith money that you are setting aside in a trust. It does not go to the seller. However, you are giving it in a trust, whether it be the real estate agency trust, the title company trust, but we're going to hold that money.

We're going to hold that money in earnest that you as a buyer are going to do everything you can to bring that loan to the closing table. You're going to buy that house, you're going to go to the closing table.

Upon a successful closing, you get that money back. So, you do get that $3,000 back. That $3,000 could then go towards your closing costs, your prepayeds, and everything else you need at the closing table.

So, earnest money feels like it's an addition to because you typically have to give it into the trust within somewhere between 24 and 72 hours of an accepted offer. Now, those timelines might vary depending on your offer. I'm going with the typical average of what I see.

So, again, typical average, about 1% of the purchase price. In this case, we're using a $300,000 loan amount, that'd be $3,000.

With that being said, you have your closing costs. Now, closing costs are those third-party fees of which you have to pay. That is for title insurance, closing with a notary.

You always have to close with a notary public. That is a third party to the transaction to ensure that your loan officer isn't trying to talk you into something to buy, or real estate agent isn't trying to talk you into something without going through all the details.

Again, that's why we have a third-party notary that comes in to close that loan and sign off on the paperwork that you are, in fact, signing on behalf of yourself.

Now, with that being said, we have the title insurance, we have the notary public. We have to record this mortgage and deed at the clerk of courts. We also have to have an appraisal in most cases. We have to hire the appraiser out to do that appraisal. That is part of it.

You have your underwriting fee, processing fee, we have to pull a credit report. Different credit agencies charge different for either an individual or a joint credit report, but either way, that credit inquiry does cost something, and they are charging you, the borrower, in order to do that or utilize that service.

Then we also have, um, verifications of employment. We have to work with The Work Number or another payroll company like ADP, or maybe Paycom, things of that nature. So, these are all third-party fees that go into your loan. We have to hire them out, we have to ensure all of these things happen.

Now, there might be some other fees. If you're buying a condo, there might be a condo association fee to do the condo work that we need, things like that. So, everything is different.

If you're buying a new construction, you might have your initial appraisal fee, but then at the end when the home is completed, you might have your final walkthrough to ensure that the house is completely built and is no longer in a "subject to" matter, but is now in an "as is." "As is" on an appraisal means the home is complete, everything is done.

So, every loan we do has a little bit of different closing costs. However, those third-party fees get charged together, they are itemized for you on, when you're starting a loan, your loan summary, and when you're finishing a loan, your ICD, which is also known as your initial closing disclosure, then followed up by the final closing disclosure.

Those fees should be pretty close to accurate throughout the transaction. If there's ever a fee that comes up that's outside of what we initially disclosed to you, we have to redisclose that to you and get your signature before we can charge that.

Now, on that loan summary, ICD, or final closing disclosure, there's also a section called prepayeds. The prepayeds are the ones that get confused the most, so I wanted to take a decent amount of time today to discuss those.

Now, let's go into prepayeds. Prepayeds are probably the most confusing part to a consumer/buyer out there. And the reason being is because of the prepaid interest you have due, maybe the homeowner's title insurance, and things of that nature.

You're also going to have to set up your escrow account. You're going to pay a full year of insurance upfront. So, let's break this down for you really quick, okay?

So, one of the biggest questions I get is, "Kristen, I just paid a full year's of insurance. Why am I now putting insurance into my escrow account?"

Well, very simple: when you buy a home, you have to have one year of insurance paid upfront. So, if you're closing September 20th, you're going to need one full policy paid from September 20th of 2026 to September 2027.

That's great! That pays you up till next year. Your next premium due date is going to be September 2027. Well, where's that money going to come from? It's going to come from your escrow account.

So, the reason why we take one full year of homeowner's insurance and typically two months put into your escrow account is so that every time you make a payment when your payments come due, you're paying into that escrow for your insurance, as well as taxes, so that way next year in September, you're going to have a full year's of insurance to be paid on your behalf.

Why do we do the two months upfront? Well, let's say you're still closing on that September 20th date. Your first payment isn't until November, so we have an October and September that you're going to own the home that we're going to need you to put into your escrow account so that next year, when your insurance comes due in September, you're going to have a full 12 months into that escrow account to pay that.

Same thing with taxes. While you're going to start paying September/October, you're going to have that two-month cushion in there. Then your payment starting November 1st until next year is going to take the rest of that tax bill for you, so when they come due in December, you have enough money to pay it.

With taxes, when you're there, you will see in your prepaid section of your initial or final closing disclosure, if you're closing in September, you're usually going to see those 9 months plus a 2- to 3-month cushion.

The reason for that again is 9 months plus October and a cushion, you'll make your November payment. They're going to charge you, as a lender, we have to charge you for all of that.

And as a buyer, you speak and go, "Wait a minute, though, but I've only just am buying the house." Correct. On the front page of these disclosures is where you're getting all of your credits, and you will see a credit for the taxes from the seller of a proration when they lived in the house.

So, from January 1st till September 19th is those taxes that they're going to pay. There's going to be a credit there that then is going to offset the 12 or 13 months of taxes that we're going to take in the prepaid section.

So, you're only going to be, as a buyer, really on the hook for 2 to 3 months of those tax returns. Every lender's different. Some only take a 2-month cushion, some take 3, so that's why you're hearing me say 2 to 3 months.

That way, when the taxes come due this December, you have a fully sourced escrow account to pay those taxes on your behalf. In the state of Wisconsin, most tax bills come out between December 10th and 15th.

Your escrow account is going to pay those on your behalf. 99% of people who escrow in the state of Wisconsin typically have them paid by the end of December. If you have them paid in January, you might see an additional month there, but this is just to give you an idea.

So now, into this prepaid account, we've now charged you 10 days of interest upfront because your first payment isn't going to be till November 1st, even though you're closing on September 20th.

That interest again pays the rest of September. When you make a payment on the first of any month, you're actually paying the month prior's interest. So, that October 1st payment would be paying that September interest. You've prepaid that on your closing disclosure, which is why you don't have a payment until November 1st. You've already prepaid it.

Taxes, you've put into your escrow account. So now you have one year of homeowner's insurance, you have all of the taxes you need to set up your escrow account, and you've prepaid the interest due. That is considered your prepayeds.

It is not odd to see somewhere between $5,000 and $6,000 in the state of Wisconsin to set up your escrow, taxes, prepayeds, and your one year of homeowner's insurance. Those are all in the prepaid section of your closing disclosure.

Plus the closing cost page. So, you're going to see on the second page of the disclosure, you're going to see every itemization, every closing cost, prepaid interest, tax escrow account, your one year of homeowner's insurance, and you're going to see the total due.

Then you're going to follow it up with the first page, which is going to break down and itemize any credits you've received, whether that be a seller credit to help you pay your closing costs, the credit they're giving you for the portion of taxes that they've lived in the house from January 1st till the day of closing. That's all going to be in there.

So, those are the credits. You're going to take all the debits, you're going to subtract the credits. Whatever is overall left is going to be charged to you as the consumer, as the borrowing person on that loan.

If that is an addition to your down payment, those will all be equal there. And remember, let's say your closing costs are $3,500 and your prepayeds are $3,500.

You have no credits coming from anyone because you as a buyer, to sweeten your offer to purchase, decided to pay the taxes for the seller for that year. $7,000 is what it's going to cost you to get into that house, approximately, plus any down payment.

If you have no money down, $7,000. Now again, remember that $300,000 purchase price with the 1% earnest money of $3,000? You've already paid that. You've brought yourself to the closing table successfully.

That $7,000 is going to then have a credit of $3,000 from the earnest money you paid, leaving you a difference of $4,000 that you will need for closing.

So, remember, this all comes back around, but your earnest money is not only used as your good faith money, but then credited back to you upon a successful closing.

So, that's why we say you can use your earnest money essentially twice, okay? You're not really using it twice, but they're holding it in an account for you, and then you're getting it back to come off all of your closing costs and prepayeds to then become, um, the homeowner at the closing table.

If that is $4,000 left and the seller gives you a $2,500 credit, take that off, see how the money then starts dwindling down by what you owe at closing.

So, those things can happen. That's why credits and understanding what all the credits are as part of your home purchase is so important.

Sometimes, we get a credit to the closing costs after a home inspection, after some negotiations change in the middle of the loan program. It's extremely important for your lender to get that amendment with any credits now coming to the loan process than before it started when you negotiated in the beginning, maybe didn't have any seller credits and now you do. Very typical.

Right now, I get asked this all the time, and I'm still standing: about 50% of our buyers have seller credits for one reason or another, the way they were negotiated in, and 50% of them don't.

So, we want to make sure we understand all credits. We also want to understand, because this time of the year when taxes become a greater deal and are going to be coming due closer and closer to closing, that's when we start to see buyers sweeten the pot by adding no tax proration credit from the seller, and the buyer's actually going to fund their own escrow account, which could save the seller a couple thousand dollars.

So, we get into these negotiations. This is again why it's so important for your real estate agent to have a relationship with your lender and constant communication, because these things change throughout the loan.

Getting the accepted offer is definitely extremely important. Understanding any amendments that arise during the loan and the accepted offer process to the closing table is where all that communication happens.

And why it's so important for you to have that great relationship with your lender, but also for your real estate agent to have that great relationship with your lender because in tandem, we need all of this information to make sure we're always giving you the best and most accurate numbers throughout the loan process.

Again, why we follow up 10 days before closing to say, "Just making sure there's nothing changed in this."

Real estate agents are humans. Sometimes they forget to send the amendments over, and we're unknown of that. That's why, again, maybe just putting an email together with your agent, your lender, just saying, "We now have this credit coming, great."

As a team, we always follow up again 10 days prior to make sure, did anything change, that we have plenty of time before your closing as a consumer/buyer that you know of all your numbers as accurately as we can put them.

Those are the things that are also fees that are a part of your loan and your home process. So, remember, if you are purchasing a home with no money down, that doesn't mean that you don't have to have any money involved.

You do, um, and it's important to know that aspect, as well as if you are putting money down, what is that that you're going to need for funds to close on top of that money down.

When I work with clients, I always say, "Okay, what is your all-in at closing?" Meaning your earnest money, your down payment, your closing costs, everything. What do you have as an all-in?

That all-in then I know upfront what we have. I'm never going to say, "This is your down payment," and then surprise you at the end and go, "Oh yeah, by the way, now you also owe me an extra $7,000."

You're going to know about that from upfront. We're going to have it in your loan, we're going to explain that, we're going to truly understand upfront what you need at closing when it comes to your loan scenario, because it's so important that you know exactly what that money is from the beginning to the end.

If you have any questions at all on escrow, prepaid setup, closing disclosures, and the why, please drop the comments below. We would love to be able to help you out.

And as always, thank you so much for tuning in to the Always On Point podcast. I couldn't do this without you, with your questions. Keep 'em coming!

You can email me at ambosteam@pointmtg.com. Send those over, we'll get 'em answered for you on a podcast coming up.

Thank you again, we'll see you next week.