One of the biggest (unpleasant) surprises to a first time home buyer is closing costs. You have worked hard and saved enough money for a down payment, but for some reason, no one likes to talk about the hidden costs of buying a home. This is unfortunate because closing costs can be quite expensive and are an area of negotiating that can really help or hurt a home buyer.
What exactly are closing costs?
Closing costs are the fees that must be paid to third parties who are involved in the sale and transfer of real estate. These third parties include real estate agents, escrow officers, insurance companies, appraisers, and a host of other service providers. The amounts paid will vary by area and the purchase price. To make matters even more complicated, each area has customary practices on who pays which item.
Closing costs are divided into two distinct categories: Non-Recurring and Recurring. Non-recurring closing costs are the costs associated with buying the house. Recurring closing costs are the costs you will pay continually to own the house (taxes and insurance).
Looking at the chart below, I have listed the typical closing costs for a $300,000 purchase in either the seller’s or buyer’s column as well as by dividing the closing costs into the appropriate non-recurring or recurring section. The first thing you may notice is that the total cost is quite overwhelming.
Wait a minute! I thought the seller paid half of the escrow!?
Yes, it is very common for the seller to pay ½ of the escrow fee. Note that the escrow fee is a (as in one, as in singular) fee. The escrow fee in my example is $1,000 and the buyer and seller did in fact split that fee. It would be quite unreasonable for the seller to be expected to pay for your costs to buy the house.
Are there any options to get the closing costs down?
Absolutely!! The chart below depicts normal and customary fees. However, there are several ways to structure a transaction to get the closing costs down to zero. I have personally closed many transactions in the Sacramento / Stockton area where the buyer brought in no money at all for closing costs. There are essentially two ways to do this. First, lenders can provide a credit rather than charge fees. In short, if you agree to take a higher rate the lender will give you a credit. The problem with this is, like they say in Vegas, you can’t beat the house. The lender will make their money back in higher interest payments and you will likely pay back that credit many times over. The second way to get closing costs down is to ask the seller to give you a closing cost credit. Most lenders will allow a seller to provide up to a 6% seller credit. In my example, a 6% seller credit on a $300,000 purchase would get you $18,000 in credit. The problem here is the seller will realize that they will pocket $18,000 less and probably not be too happy with your offer. To overcome this objection, many sellers increase their offer to offset the credit. A reasonable offer may be $305,000 with a 3.5% credit. In this case, you are offering the seller $5,000 more but asking for $10,675 in credit. Of course you will be paying more for the house, which means a higher payment and higher property taxes. But, it is a great way to cover the closing costs.
Who pays what is completely negotiable. It would not be uncommon to see a seller pay all of the title and escrow fees if the buyer is bringing a strong offer at or above the market value. In the same way, a buyer may want to pay less for a home and offer to pay more of the closing costs.
The key thing to remember is that you need to have your lender and real estate agent provide you with a reasonably accurate estimate of your closings costs before you are in contract.
There are additional fees that both buyers and sellers may incur. As a buyer, you will certainly want to have a home inspection performed by someone you choose. A home inspection will cost about $500 and the findings may lead to more inspections. You may also want a home warranty (another $550) which may be paid for by either the buyer, seller, or split.
A good real estate agent will understand how to evaluate your needs, the market value of the home, and the current state of the market to write an offer that makes sense. I have personally seen sellers refuse to accept poorly written offers that asked too much of the seller. Don’t be afraid to question your agent on how he / she has written the offer and be clear on what you are being asked to pay before you sign that contract.
|Non-recurring Closing Costs|
|Item||Buyer Typically pays||Seller typically pays|
|Real estate commissions||$15,000|
|Natural Hazard Disclosure||$100.00
|County Transfer Tax||$330.00|
|Escrow Fee||Usually split 50/50||$500.00||$500.00|
|CLTA Title Fee||Usually split 50/50||$600.00||$600.00
|ALTA Title Fee||Buyer paid||$500.00|
|Notary Fee||Each party pays their own||$250.00||$250.00|
|Lender Fees||Includes underwriting, credit reports, and possible points||$3,000|
|Recurring Closing Costs|
|Home Owner’s Insurance||1-year policy||$1,200.00|
|6-months of property taxes||$3,750.00|
|30-days of interest||$1,125.00|
|TOTAL CLOSING COSTS||$10,875.00||$16,780.00|