You’ve saved some money.

You’ve talked with a lender.

You’ve been pre-approved.

You know approximately how much house you can afford.

And then someone starts talking about closing costs.

Wait.

I need money for those TOO?

If you’re a first-time homebuyer, you’re definitely not the first person to be surprised by this part of the process.

One of the biggest misconceptions I hear from buyers is that the down payment is the only money they’ll need to purchase a home.

Your down payment is important, but it’s only one piece of the financial picture.

So let’s talk about closing costs, what they can include, and what I want my buyers to understand before we ever write an offer.

First: Your Down Payment and Closing Costs Are NOT the Same Thing

This is probably the most important thing to understand.

Your down payment is the portion of the purchase price you’re paying toward the home rather than financing.

Your closing costs are expenses associated with completing the purchase and obtaining your loan.

And then there’s another term you’ll hear:

Cash to close.

Your cash to close is the amount you’ll actually need to bring to closing after accounting for the various charges, credits, deposits, down payment, and other amounts associated with your transaction.

These numbers can look confusing on paper, especially the first time you see them.

Don’t worry.

Your lender and closing professional will provide the official figures, and we’ll help you understand where you are in the process.

What Can Be Included in Closing Costs?

There isn’t one universal closing-cost amount that applies to every buyer.

The expenses depend on your loan, lender, property, insurance, contract, and transaction.

Depending on your particular purchase, you may see expenses related to things such as:

• Loan origination or lender charges
• Appraisal
• Credit-related fees
• Title work
• Closing or settlement services
• Recording fees
• Homeowners insurance
• Prepaid interest
• Property tax-related items
• Escrow funding
• Mortgage insurance, when applicable
• Other loan or transaction-specific charges

Not every buyer will have every one of these expenses.

That’s why I don’t want you relying on a random closing-cost calculator online and assuming the number it gives you is exactly what you’ll pay.

Your lender can give you a much more accurate estimate based on your actual loan.

What Are Prepaids?

You’ll probably hear this word during the loan process too.

Some of the money needed at closing may be for prepaid expenses rather than a fee for a service.

For example, you may be paying certain homeowners insurance, property tax, escrow, or interest amounts in advance.

That distinction matters because when buyers see the total amount needed to close, they sometimes assume every dollar is a “fee.”

It isn’t necessarily.

Part of that money may be establishing accounts or paying expenses associated with owning the home.

What Is an Escrow Account?

Depending on your mortgage, your lender may establish an escrow account.

Each month, part of your mortgage payment may be collected for expenses such as:

Property taxes and homeowners insurance.

The lender holds those funds and pays the applicable bills when they’re due.

When you purchase the home, money may be collected at closing to establish that account.

This is one reason your cash-to-close figure may be higher than you initially expected.

Can the Seller Pay Some of My Closing Costs?

Sometimes.

You’ll often hear this called seller concessions or seller-paid closing costs.

Depending on the loan program, contract, market conditions, and negotiations, a buyer may ask the seller to contribute toward certain allowable closing costs.

Here’s something important, though:

Seller concessions aren’t automatically free money.

They’re part of the overall offer.

For example, imagine a home is listed at $250,000.

An offer at $250,000 with no seller concessions is financially different for the seller than an offer at $250,000 asking the seller to contribute $8,000 toward the buyer’s costs.

The seller is looking at their net proceeds, not simply the number at the top of the contract.

This is where offer strategy becomes important.

Should You Always Ask the Seller for Closing Costs?

No.

Sometimes asking for seller concessions makes a lot of sense.

Sometimes it may make your offer less competitive.

It depends on the house, market, other offers, your financing, how long the property has been listed, and your individual financial situation.

This is exactly why I don’t believe in writing every offer the same way.

We need to look at the entire situation.

If keeping more cash in your bank account is important, we may discuss asking for concessions.

If you’re competing against multiple offers, we may need to think differently.

There’s strategy involved.

Builder Incentives Can Affect Closing Costs Too

If you’re considering new construction, you may see builders advertising incentives toward closing costs.

Those incentives can be valuable, especially if they’re tied to using the builder’s preferred lender or closing company.

But don’t stop at:

“They’re giving me $10,000!”

Let’s look at the entire financial picture.

What’s the interest rate?

What’s the sales price?

What are the lender fees?

What expenses does the incentive actually cover?

Are there other financing options available?

What will your monthly payment be?

A big incentive sounds great, but I want you to understand the whole transaction before deciding whether it’s actually the better deal for you.

If you’re considering building or purchasing a new home, I’ve written another guide comparing New Construction vs. Existing Homes in Shelby County, and I’ll link that here.

What About Earnest Money?

Earnest money is another amount buyers sometimes confuse with closing costs.

When you write an offer, your contract may provide for an earnest-money deposit.

Think of earnest money as money you’re putting forward as part of the transaction according to the terms of your contract.

If the transaction closes, earnest money is generally accounted for on your final closing statement rather than simply disappearing.

Exactly how earnest money is handled depends on the contract and transaction, so we’ll review those terms together when writing your offer.

Don’t Forget the Expenses BEFORE Closing

This is another thing I discuss with first-time buyers.

Not every home-buying expense happens at the closing table.

You may need money earlier in the process for things such as:

Earnest money

Home inspection

Specialized inspections

Appraisal

Other due-diligence expenses

Some fees may be handled differently depending on your lender and transaction, but the point is:

Don’t put every dollar you’ve saved into your down-payment calculation.

You want to understand the whole process before you start shopping.

How Much Should I Budget for Closing Costs?

This is where I’m going to resist giving you one magic percentage.

You’ll see plenty of websites give broad estimates for closing costs.

Those can be useful for very early planning, but I don’t want a buyer making a major financial decision based on a generic percentage they found online.

Your actual costs depend on too many variables.

Instead, once you’ve spoken with a lender, ask:

“Can you show me approximately how much cash I would need to close at this price point?”

Now we’re working with numbers based on your loan rather than somebody else’s.

And when we’re considering a specific property, we can evaluate those numbers again.

Your Loan Estimate Is Important

Once you’re moving forward with financing, your lender will provide disclosures showing estimated loan terms and costs.

Read them.

I know.

Mortgage paperwork isn’t exactly exciting bedtime reading. 😂

But these documents contain important information about your loan.

If something doesn’t make sense, ask.

You are never bothering me or your lender by asking:

“What does this mean?”

It’s your money.

You should understand it.

Then Comes Your Final Cash-to-Close Number

As closing gets closer, your lender and closing professionals work toward the final figures for the transaction.

Those numbers take into account things such as your loan, down payment, earnest money, applicable credits or concessions, taxes, insurance, lender charges, title-related expenses, and other transaction items.

That’s when we get much closer to the answer everyone wants:

“Exactly how much money do I need to bring to closing?”

Your lender or closing professional will give you instructions for transferring the necessary funds.

And here’s a very important reminder:

Always independently verify wiring instructions using a trusted phone number before sending money.

Real estate wire fraud is real.

If you receive an email unexpectedly changing wiring instructions, do not simply follow it.

Stop and verify.

Don’t Let Closing Costs Keep You From Asking Questions

Sometimes buyers start reading about all these expenses and immediately think:

“There’s no way I’m ready to buy.”

Maybe you aren’t.

And that’s okay.

But don’t make that decision before actually talking with someone.

There may be loan programs you haven’t considered.

You may qualify for options you didn’t know existed.

A seller concession may be possible.

A builder incentive may help.

Or maybe we determine that you need another six months to save.

I’d much rather help you create a realistic plan than have you assume homeownership isn’t possible because of something you read online.

Frequently Asked Questions About Closing Costs in Alabama

Are closing costs included in my down payment?

No. Your down payment and closing costs are different components of the transaction, although both can affect the amount of money you’ll need to purchase the home.

Can I finance my closing costs?

Whether and how certain costs can be financed depends on your loan program and transaction. Your lender can explain the options available for your particular loan.

Can a seller pay all of my closing costs?

Loan programs can place limits on seller contributions, and the seller has to agree to the concession. Your lender and REALTOR® can help you determine what’s permitted and appropriate for your transaction.

When will I know exactly how much money I need?

You’ll receive estimates earlier in the loan process, and the figures become more precise as you approach closing. Your lender and closing professional will provide the final information and instructions.

Do I still have closing costs with a zero-down-payment loan?

Potentially, yes. A zero-down-payment loan means you may not have a traditional down payment, but there can still be closing costs, prepaid expenses, and other transaction expenses.

What’s the difference between closing costs and cash to close?

Closing costs are expenses associated with the transaction. Cash to close is the final amount you need to provide after the various charges, credits, deposits, financing, and other transaction figures are accounted for.

Buying a Home in Calera or Shelby County?

If you’re thinking about buying a home but have no idea how much money you’ll actually need, please don’t feel embarrassed to ask.

That’s an extremely normal question.

In fact, it’s one I’d rather you ask BEFORE we start looking at houses.

We can talk about the process, get you connected with a trusted lender, determine a realistic price range, and help you understand the expenses that may come along the way.

Maybe you’re ready right now.

Maybe you’re six months away.

Either way, having a plan puts you in a much better position when the right house comes along.

If you’re considering buying a home in Calera, Shelby County, or the surrounding Central Alabama area, I’d be happy to help you figure out where to start.