If you've ever purchased a home before you know that there's more to the financial details than simply the purchase price of a home and your down payment. While the down payment is usually the single most expensive part of purchasing a new home, the other costs involved can be pretty expensive themselves. These extra costs are known in the industry as "closing costs". Unfortunately, many first time home buyers are not aware of all the buyers closing costs involved and are shocked when they find out how much cash they really need to have.
Also unknown to many home buyers, both new and seasoned, is the fact that many of the closing costs are negotiable. While not every banker or lending institution will be willing to play ball with you, some will if it means the difference between gaining or losing your business. Knowing what your closing costs are, and being willing to come to the bargaining table, could end up saving you thousands of dollars in the end. Below is a brief introduction in what you need to know.
Types of Closing Costs
There are basically two types of closing costs: one-time costs and recurring costs. The recurring ones we won't worry about in this discussion because they technically aren't closing costs at all. They are things like property tax, homeowners insurance, etc. While you may have to pay a portion of these things at closing, they are payments that you'll be making as long as you own a home. In fact, these things might be better classified as part of the cost of ownership.
As for one-time costs, these include any number of things which might be required by law or are thrown in by the lender as a means of making extra money. Often these are referred to as "junk costs" because many of them are really meaningless at the end of the day. It is these junk costs that are negotiable most of the time. The following list includes some of the more common one-time costs associated with closing a home loan. The list is by no means conclusive.
Escrow Fees
Escrow fees are the amount of money you will pay in to your escrow account in order to be prepared for coming tax payments and insurance premiums. Tax payments are typically made either annually or every quarter. So the amount of money you must contribute upfront depends on where in the tax cycle you are on closing day. Escrow fees cannot be negotiated.
Home Inspection & Appraisal Fees
Home inspections and appraisals are done in order to ensure that both the buyer and the lender are protected. A home inspection is typically arranged by the buyer and is either paid upfront or paid at time of closing. You obviously have control over this because you can choose any home inspector you like. On the other hand, the bank sends its own appraiser to look at the house prior to close. You can negotiate with your lender how much you're willing to pay towards this service.
Document Preparation, Recording, & Notarization Fees
Anyone who's bought a home before knows the mounds of paperwork involved. Banks try to recover the costs of preparing such paperwork by passing them on to the home buyer. But as the buyer, you have the right to assume that the document process is part of the cost of doing business. If you believe those costs should not be passed along to you, feel free to negotiate. Some lenders will reduce the fees while others may drop them completely.
Attorney Fees
In any home transaction it is advisable for buyers and sellers to each retain their own attorneys. The attorney looks out for your interests by making sure that everything is on the up and up from a legal standpoint. That being said, lawyers compete for your business just like everyone else - so prices are negotiable. If the lawyer you've chosen is unwilling to work for a fee you can live with, there will undoubtedly be others in town that will.
Paying for Closing Costs
For new home buyers, closing costs can be almost as much as the down payment itself. If you have the cash put away for your purchase, the closing costs may not be a problem for you. But if you, like most home buyers, went into the experience without taking into consideration closing costs, you might find that you don't have the cash available. That doesn't mean you're dead in the water; you just need to be creative.
In most states there are down payment assistance programs available to help those within certain income limits. Generally speaking, if you make under $50,000 per year you'll be able qualify for some sort of down payment assistance. If not, you can always write into your purchase offer a stipulation for the seller to either help you with closing costs or pay them entirely. If need be, you can even increase the total purchase price in order to encourage the seller to agree to the deal.
Knowing what you're getting into before you make a purchase offer on a home is important. Be sure to speak with your attorney, real estate agent, and mortgage broker so that you're fully aware of all closing costs involved. And where there's room to bring prices down don't be afraid to negotiate in confidence.