If you’re preparing to purchase your first house and are not familiar with the term, “closing costs,” you may be in for an uncomfortable surprise. Closing costs for buyers include all the fees for services and clerical work that transpires during your real estate transaction.
Closing costs can add up to the tens of thousands of dollars, depending on the price of the home you’re buying, and on the lender with whom you chose to finance your new house.
Here’s what you should know about closing costs for buyers.
How Much Are Closing Costs?
Closing costs are expensive – to the tune of tens of thousands of dollars. Your lender will determine a majority of your closing costs, but you can do a bit of math to get a realistic idea of what you’ll pay.
Closing costs typically run between two and eight percent of the amount of money you’re borrowing, but an estimate of five percent will get you in the ballpark.
If the house you’re buying is worth $350,000, and you estimate closing costs at five percent, you’ll be paying somewhere around $17,500, give or take a few thousand.
How Are Closing Costs Paid?
In most cases, you’re not able to roll your closing costs into your home mortgage loan. Instead, it’s cash out-of-pocket that you pay on closing day when you get your keys.
There are some lenders, however, who may be willing to negotiate closing costs so that they’re incorporated into your loan. But if that’s the case, you’ll be paying interest on those closing costs for the next 30 years or so.
How Your Lender Influences Your Closing Costs
Your lender is the one who will provide you a list of estimated closing costs when you apply for your home mortgage loan. And, three days before you close on your new house, your lender will supply you with a statement of actual closing costs.
It’s important to research lenders before you apply for your home mortgage loan. Each lender has different interest rates, charges, and fees. You can compare their estimated closing costs to determine which lender might be best for you.
Here are some examples of lender fees that may be included in your buyer closing costs:
- Application Fee: Also referred to as an origination fee, the application fee is the cost associated with processing your home mortgage loan application.
- Credit Check Fee: One of the first things a lender does when processing your application for a home mortgage loan is to run your credit report. There’s a cost to obtaining a credit report; rather than having you pay that out-of-pocket up-front, you pay it at the end in your closing costs.
- Underwriter Fee: The underwriter is the person who reviews your application to determine whether or not you’re eligible for a home mortgage loan.
- Private Mortgage Insurance: In some instances, buyers don’t have the full 20 percent down payment that’s required to purchase a house, so the lender may agree to a lower down payment, but charge a monthly private mortgage insurance fee. Private mortgage insurance, or PMI, protects the lender if you stop making your payments.
- Lender’s Title Insurance: When you purchase a house, the title of that house is transferred from the seller to you. After you’ve closed on the property, if there are any disputes regarding the title, then the lender’s title insurance protects the lender.
- Owner’s Title Insurance: Your financial institution will also require you to have title insurance so that if the title is contested, you’re protected as well.
- Homeowners Insurance: Another requirement your lender has is that you maintain homeowner’s insurance on the house you’re buying. To ensure this, the bank collects several month’s worths of payments in advance via your closing costs and then pays that policy on your behalf. In some locations, additional policies like flood or fire insurance may also be required by the lender.
- Property Taxes: As with homeowners insurance, you’ll be required to pay several months’ worth of property taxes, which are also part of your closing costs. Your homeowners’ insurance payments and your tax payments are held in an escrow account, a type of savings account, managed by your lender.
- Escrow Fees: Your escrow account, the account that holds the money for your property taxes and insurance, has fees associated with it, too.
- Attorney Fees: Many lenders use attorneys or require buyers to have legal representation during real estate transactions. If attorneys are used in the transaction, those fees are part of your closing costs.
These are just a few examples of closing costs that are specific to the lender. When you have estimated closing costs from multiple lenders, you may be able to use that information to leverage lower closing costs from your lender.
Appraisers, Inspectors, and Surveyors
Another chunk of change is added to closing costs for charges associated with appraisals, inspections, and surveys.
To finance your home, your lender must know that the property that you’re buying is worth the amount of money you’re borrowing. An appraiser uses a comprehensive market analysis, a report of recently sold homes in your area, to determine the current market value for homes similar to yours. He or she then inspects the home to assess its condition and how it has aged. The appraiser then submits his report to the lender.
If the house does not appraise for the asking price, you may try to negotiate a lower price with the seller, pay cash for the difference, or look for another property.
Another requirement your lender has is that the property is inspected. An inspector looks for pests, foundation issues, problems with the roof, air and heating systems, water heater, plumbing, electrical, and more. The inspector also submits his or her report directly to the lender.
If problems are found during the home inspection, you can negotiate for the seller to fix the issues, negotiate a lower price so that you can make repairs, or, if the problems are insurmountable, find another property.
The inspection and appraisal are not optional, but you might find variations in the price lenders associate with those services.
How to Negotiate Closing Costs with a Seller
You already know you can attempt to negotiate closing costs with your lender, but you may also be able to work with the seller to split the costs, or, to have the seller pay all of the closing costs, which isn’t entirely uncommon in a buyer’s market with motivated sellers.
Negotiating with the home’s seller to pay closing costs is a contingency you’ll include with your offer. In a buyer’s market, which is when there are more houses for sale than there are buyers, sellers may find no issue with this contingency. However, in a seller’s market, that contingency could cost you the deal. Talk with the real estate agent you hire about whether or not negotiating closing costs is practical in your situation.
Buying your first house is more than a little exciting, but it can also be stressful, especially when the dollar signs keep going up, stretching your budget to its max. But, if you’re educated ahead of time, you can properly prepare and lower your costs by shopping lenders and trusting your real estate agent.
Have Questions? Ask Allison!
Your real estate agent is the best source of information about the local community and real estate topics. Give Allison Norman call today at 707-799-3617 to learn more about local areas, discuss selling a house, or tour available homes for sale