Purchasing a property has never been packaged as an easy (or cheap) undertaking. From understanding interest rates in the broader market to the ebbs and flows of the housing market in particular, just grasping the complexity of a home mortgage loan can be headache-inducing. Add to that the recommendations of receiving multiple quotes from multiple financing institutions and the debates for and against adjustable versus fixed rates, the whole process can seem utterly overwhelming.
Yet, even if financing a mortgage seems stressful by itself, it is far from the only aspect of house hunting that can be financially nerve-wracking.
Many people make it to the closing table, where the title will be legally transferred from seller to buyer, and are caught off-guard by closing costs and how to handle them.
Additionally, the final amount payable can vary significantly; with an average range of 3-6 percent of the purchase price, you can be faced with paying thousands of dollars you didn’t anticipate before you saw the closing cost documents.
Chrystal Caruthers, realtor and real estate editor and columnist, stated, “Why the broad range? Taxes. Buying a house means paying taxes and sometimes transfer fees upfront, at the closing. While there are settlement costs that go to your attorney, title insurance company, and lender, the biggest beneficiary is the government – city, county, and state.”
And if you want further proof of the volatility of closing costs, just look at the last couple of years’ worth of data. In 2014 closing costs increased 6 percent and now average $2,539 on a $200,000 loan. But this year they’re 7 percent lower, and average about $1,847 on a $200,000 loan, according to data from bankrate.com.
What Closing Costs You Are Likely To Find
- Credit Report Fee: The fee you incur when your credit report and score are pulled.
- Loan Origination Fee: The fee associated with processing the loan paperwork.
- Attorney fee(s): Legal fees for both parties attorneys.
- Inspection fee(s): A fee paid to a third party to look for foundation, construction, electrical damages throughout the home.
- Pest Inspection fee: Separate inspections may be required or highly suggested for certain properties based on construction, age and location (i.e., termite inspections, fire ant inspections).
- Appraisal fee(s): Both buyer and seller may wish to have separate appraisals done on the property.
- Survey fee: The property may require verification of property lines, which will cost you.
- Title Search fee: Any background check into the title of the property will come with a price tag.
- Escrow deposit: This is usually a few months’ property taxes and insurance.
- Government Recording fee: This is the fee paid to the city/county for documenting the new land record.
- Underwriting fee: The cost of evaluating the mortgage loan application.
- Title services and lender’s title insurance fees
- Flood, Tornado, Acts of God Certification fees
- Messenger fees
- Commission fees
- Charges for specific interest rates
- Application fee
- “Other Settlement Services”: A broad term frequently used to categorize fees and charges that are not associated with the loan origination, lender or broker, but still associated with the purchase of the property.
It is important to keep in mind that closing documents are not universal, nor are mortgage provider forms. Fees may be categorized differently or rolled into a broader name. For example, some documents may itemize property taxes and insurance as separate entities, while others may bundle these and additional items into a single escrow deposit.
Which Fees Are Negotiable
It’s fairly well known that interest rates are negotiable, but what about the other costs that involved with purchasing a home?
You may have heard of sellers covering all closing costs, and while that is possible, it is not always probable. If you are expecting the seller to pick up this tab, make sure that is spelled out and documented before coming to the closing table.
Some (or all) closing costs can be negotiated between the buyer and seller, and a few are even negotiable with the lender/broker.
Frequent closing cost items you can shop around for:
- Home inspections
- Homeowners’ insurance
Items that your lender or attorney may be able to waive completely:
- Application Fee
- Credit Report Fee
- Other Settlement Services
Your lender or real estate agent may provide you with a preferred list of companies they like to deal with (specific exterminators, insurance providers, or law offices), but you are not obligated to stick with those.
Vicki Bott, Wells Fargo Home Mortgage senior vice president of credit strategy, commented, “There is opportunity for the borrower to go out into the market and determine if there is a vendor or company who may provide a more competitive fee.”
When in doubt, ask. You may be surprised by what fees are negotiable or able to be waived. A piece of advice: If the fee sounds broad, it is worth questioning.
How Can Closing Costs Be Financed?
Sometimes, the closing costs are expected to be payable at the closing itself, while other times, the buyer can request the costs be rolled into the mortgage. Be aware that if the latter is chosen, it can raise your interest rate and the overall cost of your mortgage.
One final word on “surprise” fees and being caught unaware at closing: Make sure you receive a good faith estimate from your lender/broker before coming to the closing table. Go through all documents line by line. This document outlines estimated expenses you are likely to encounter for your specific purchase at the upcoming closing.
If there are items on your closing documents that were not on your GFE, or if you have any questions at all, insist on an explanation. It’s your responsibility to ensure you understand the documents you sign. As with all contractual agreements, your signature legally binds you to the agreements found within, whether you read them and understand them or not. Be responsible for your own actions and come prepared.