Home buyers know there will be closing costs associated with getting a mortgage. Buyers save up money for a down payment but also must consider the various closing costs involved. You can get a general idea on what types of costs you can expect on a typical home purchase by speaking with your loan officer over the phone or requesting a cost estimate. However you get these numbers, there are indeed costs involved. But there are definite strategies to eliminate or negotiate on who pays closing costs.
Closing costs come in two basic types - recurring costs and non-recurring costs. A recurring cost is something you will pay again and again. Mortgage interest is a closing cost. Property taxes are a closing cost and so are home owners insurance. These are costs you will pay over the course of the loan. Property taxes are something that you have little control over. Mortgage interest you can adjust based upon the type of loan you take and the term of your selected mortgage. Homeowner's insurance is something you can shop around for on your own so you do have some control over your insurance payments.
Non-recurring closing costs on the other hand will only happen once- at the closing table. These costs are for various services the lender needs in order to close your home loan. For example, the lender needs a property appraisal and a credit report. You’ll be quoted a fee for these and provide the needed funds to pay for the appraisal and credit. There are various other charges such as a processing fee or an underwriting fee a lender might ask for. These lender fees will be listed separately on your loan cost estimate. Third party fees include charges for an attorney or settlement agent. Title insurance is another third party fee you’ll see in addition to other title-related costs. Optional costs, those the lender doesn’t require but you elect to pay them, include fees for a property inspection or a pest inspection and others.
When you submit a loan application and have a property picked one of the many documents you’ll receive is the Cost Estimate or Good Faith Estimate. This document will itemize all the fees that you will see at your closing. Note, these are estimates but they’re pretty good ones. Lender fees such as appraisal, credit, origination and processing for example have a zero tolerance level which means the quoted fees cannot be higher when you go to close. If they are, the lender is responsible for paying them. Other third party fees the lender needs in order to close have a tolerance level of just 10% over the previously quoted number.
Who Pays Closing Costs on a House?
At your closing, there will be buyer fees and seller fees listed. You of course are responsible for the buyer’s list and the sellers have their own set of fees that will be deducted from the proceeds of the sale. There are traditional sellers and buyers costs that are paid separately but that doesn’t mean closing costs aren’t negotiable. They can be.
What Closing Costs on a House are Negotiable?
The first way to negotiate closing costs is simply to ask the seller to pay them. In your offer, you can say something like, “Seller to pay $3,000 of buyer’s closing costs” or “Seller to pay up to 2.00% of the sales price toward buyer’s costs at the settlement table. The seller can simply say yes, no or make a counter offer. You’ll want to discuss this strategy with your real estate agent. In tight real estate markets sellers are less inclined to give up anything, for example. In this situation where you want the sellers to pay $3,000 for your costs, adjust your offer upward by $3,000 to offset the seller credit.
What Closing Costs on a House are Optional?
While lenders must quote the same lender fees to all borrowers what a lender can do is provide a lender credit. This is accomplished by adjusting the interest rate on the selected mortgage upward. For example, take a 30 year fixed rate. Your loan officer might tell you that if you paid one discount point, or 1.00%, the rate on your loan will be lowered by 0.25%. Conversely, if you increase your rate by 0.25% the lender can provide a credit of 1.00% of your loan amount. A $300,000 loan with a 1.00% credit is $3,000. And finally, you can combine a seller credit with a lender credit as part of your negotiating process.
There never has been nor never will be a “no closing cost” loan. There are fees, it’s just who pays them that matters.