Closing Costs

Once of the most common things that many home buyers, and especially for first time home buyers, are unaware of is the additional administrative costs for closing on a piece of real estate. The major portion of upfront costs when buying a home is the deposit or binder you make at the time of the purchase offer and the remaining cash down payment you make at closing. However, in addition to the deposit and down payment, other up-front expenses can include the following:

• Inspections: In addition to inspections required by the lender, you may make the purchase offer contingent on satisfactory completion of some other inspections. These inspections might include: structural, water quality tests and radon tests. You and the seller will need to negotiate these fees.
• Owner's title insurance: You may want to purchase title insurance for yourself so that if problems arise, you are not left owing a mortgage on a property you no longer own. A thorough title search (going back to 1900 if necessary) is often assurance enough of a clear title.
• Appraisal fees: You may want to hire your own appraiser, either before you sigh a purchase offer or after seeing the results of the lender's appraisal.
• Money to the seller: You will need to pay for items in the house that you want and that were not negotiated in the purchase offer. Such items may include appliances, light fixtures, drapes, or lawn furniture and also fuel oil and propane left in tanks.
• Moving expenses: If you are changing jobs, your new employer may pay for your move. Otherwise, you must figure in the cost of moving, either truck rental and hired help or a professional mover. Shopping around for moving services can pay off. You will also need cash for utility deposits (phone, cable, and the like).
• Escrow account funds: In the purchase offer, you can request that the seller set up an escrow account to defray any costs of major cleanup, radon mitigation procedures, house painting, or other items. Also, if you have not had a chance to try out some appliances (the furnace if you buy in the summer or the air conditioner if you buy in the winter), you may request an escrow account to cover repairs if necessary. Depending on the purchase offer contract and contingency clauses, you may find you have some expenses immediately upon moving in. For example, suppose your purchase offer contract has a clause making the purchase contingent on a satisfactory structural inspection, and the inspector determines that the house will need a new roof. You could negotiate to have the seller arrange for the work to be done, but this will probably delay the closing date--and you may have to agree to a higher price for the house or to cover some of the expenses of the new roof. Or you and the seller may be able to split the cost of a new roof, put on after you move in, using estimates from a contractor of your choice, each of you putting funds into an escrow account for the new roof. Or the seller may be willing to reduce the sale price of the house by an amount you think is fair. In either case, shortly after moving into your new home, you will need cash for a new roof.
• Time investment: An often overlooked major up-front cost in buying a home is the time investment. The average household spends about 4 months house hunting and looks at an average of 20 houses before closing a deal. In addition to shopping for a home, you also spend time trying to find the best mortgage terms and an attorney who will assist you with the legal issues in purchasing a home.

How much time you spend looking for a home, a mortgage, and an attorney depends on your location. You will spend less time if you know what you want in a house and know much you can afford, and working with real estate agents will help narrow the choices. How many mortgage lenders are in your area? You can reduce time costs in mortgage shopping by keeping an eye on advertisements and use the internet to search for the best deals.

As with many things in this world, closing costs and discount points can be negotiated. But it's tougher for the borrower to obtain large concessions unless there are trade-offs with the lender.

For example, the lender may be much more willing to reduce closing fees or require fewer discount points if the borrower is well qualified and is making a substantial down payment. In addition, if a higher interest rate is being charged, it could bring other concessions from the lender.

Negotiate your Closings Costs

Fees are as different as the lenders who charge them. The major differences can be found in the following three major categories:

1. Loan origination fees - Many companies don't charge this fee, but some do. It's usually considered another point ( 1 percent of the loan amount) and can make a seemingly great loan package a bad choice. If charged, this is also a fee that may not be explained thoroughly upfront.

2. Separate application fees - Most companies include the application fee in the out-of-pocket expense quote; others have this as a separate fee (of several hundred dollars), which many not be explained until the borrower applies for the loan. Borrowers should ask about this when calling to check for rates and costs as the amount can vary significantly among lenders.

3. Miscellaneous fees - (often called "fluff fees" or "garbage fees"). As their name denotes, these are the most extraneous and negotiable of the bunch! They include document prep fees, courier charges, notary fees, administrative fees, document review fees, etc. The gravest problem here lies in that these fees do not have to be factored into calculating the Annual Percentage Rate (APR) quoted to the borrower. So it's totally possible that a lender quoting a low interest rate is actually making up for it by charging tons of garbage fees! Spend time reviewing the Good Faith Estimate provided to you by the lender before committing to a certain loan program.

In addition to negotiating with your lender, you can do the same with the seller as well as the other third parties. First, negotiate with the seller to take over as many expenses as possible. Don't let tradition or custom get in your way; just because the "buyer always pays for the survey" doesn't mean the seller can't pay for it in your case. Also, keep in mind that FHA and VA loans do not allow points; thus any points in financing these loans must be paid by the seller. Even if you are planning to use a conventional mortgage, see if the seller will pay for some points.

Next, negotiate with your attorney on his or her fees. Although attorneys may base their fees on a percentage of the price of the home, you may be able to negotiate to pay an hourly rate. Also, you may decide that you also need to rewrite your will now that you have a major asset in your estate. If you are equity sharing, you will need a legal contract to that effect. By packaging several legal services together (real estate closing, equity sharing contract, will), you may be able to get a reduced rate from your attorney.

Closing costs that are most likely to be negotiable, either with the seller or the lender, include application/origination fees, credit report fees, points, attorney fees (yours and the lender's), document preparation fees, surveys, inspections, money to the seller, and escrow funds from the seller (for cleanup, radon mitigation, and the like).

Statutory Closing Costs

Statutory costs are expenses you would have to pay to state and local agencies even if you paid cash for the house and did not need to take out a mortgage. They include the following:

• Transfer taxes - Required by some localities to transfer the title and deed from the seller to you.
• Recording fees - For deed pay for the county clerk to record the deed and mortgage and change the property tax billing.
• Pro-rated taxes - Such as school taxes and municipal taxes may have to be split between you and the seller because they are due at different times of the year. For example, if taxes are due in October and you close in August, you would owe taxes for 2 months while the seller would owe taxes for the other 10 months. Prorated taxes usually are paid based on the number of days (not months) of ownership. Some lenders may require you to set up an escrow account to cover these bills. If your lender does not require an escrow account, you may want to set up a special account on your own to make sure you have money set aside for these important, and large, bills.
• Other state and local fees - Ccan include mortgage taxes levied by states as well as other local fees.