Don’t let the term “closing costs” mislead you. You’d do well to think about them before you start house-hunting, not after you’ve made an offer on your dream home.
There’s one good reason for this: You might have wiped out your savings with the down payment, leaving you with no cash to pay the long list of fees associated with securing your loan.
Depending on your lender, closing costs can include fees for the loan application, costs of document preparation or appraisal, a credit report, wire transfers, a title search, title insurance, a property survey, municipal fees, tax stamps and many other charges, and they add up quickly.
Closing costs on a $200,000 house in Bankrate.com’s annual national survey averaged $3,741 in 2011, with New York the most expensive state at $6,183, Arkansas the cheapest at $3,378, and Ohio 18th on the list at $4,165. The figures assume a 20 percent down payment and good credit, and do not include taxes, government and escrow fees.
Wouldn’t it be nice if those pesky fees came out of someone else’s wallet? Often they do.
In fact, buyers commonly negotiate for sellers to pay closing costs, according to Sandy Rowe, vice president and regional manager for US Bancorp home mortgage.
Depending on the kind of loan you seek, a seller’s contribution is capped -- typically no larger a percentage of closing costs than the buyer’s down payment, said Howard Hanna realtor Cathy LeSeuer.
“If you go with an FHA loan, the seller can contribute more than with a conventional loan,” she said. “But the rules keep changing --, another reason to go with a well-recommended mortgage broker or lender.”
But don’t despair if you can’t get the buyer to help. It’s also possible to roll closing costs directly into your loan. That way you can pay them gradually over time as part of your mortgage payment.
Also, lenders sometimes offer “no closing costs” deals, though a borrower is likely to pay a higher interest rate to avoid the fees.
Buyers are typically told about strategies available to them when they get pre-approved for a loan, including projected closing costs as part of a “good faith estimate” of what their loan will cost.
By law, the final accounting of the fees cannot exceed the good faith estimate. If it does, the lender is required to pick up the difference, said Bruce Ocko, senior vice president for Charter One’s New England divisional sales district.
But closing cost information can easily get lost in the barrage of information the loan-seeker has to process. An experienced realtor, LeSeuer said, will review the information when he or she interviews their new client for the first time.
“I ask them if they want to pay their own closing costs, or if they’re going to ask the seller,” LeSeuer said.
A seller isn’t simply being charitable when they agree to pay some of the closing costs. When the deal closes, they’re not out one dime.
For example, instead of offering $95,000 for a house, the buyer who is short on cash could offer $100,000 and ask the seller to pay closing costs. In effect, the closing costs are folded into the mortgage. (In such a case, the realtor’s commission should be paid on the $95,000, not $100,000.)
Many agents expect commission on that portion of the offer, LeSeuer said.
“That drives me nuts,” she said. “The seller absolutely should not pay commission on closing costs.”
The only drawback for the buyer is that the house is taxed on its selling price of $100,000.
LeSeuer said that sellers who haven’t sold a house in a long time are sometimes taken aback that they’re asked to pay closing costs for buyer, even though doing so would get their home sold.
“I had a seller refuse a deal because of that,” she said.
A seller may think the request means the buyer may not be qualified. But Le Seuer compared the situation to that of a young doctor with a mountain of medical school debt and no savings but a bright future. Such a buyer is considered to be qualified, she said.
And sometimes a seller will volunteer to pay closing costs as an incentive for buyers, Ocko said.
Most of the fees that make up closing costs “are what they are,” Ocko said, including municipal fees, recording costs and credit report. “But consumers can shop certain lender fees, including title insurance.”
Title insurance, the highest expenditure in closing costs, can cost up to $2,000 or more. Although your bank or mortgage broker is required to give you three choices of title company, but you are not required to choose from among them.
“It pays to call around and ask price,” Anita Zaller, founder and managing member of All Real Estate Solutions LLC, a full service title and escrow company based in Mayfield Village. “We get calls, ‘Can you beat this price?’ and 99 percent of the time our price is lower.”