Coming up with a down payment to buy a home is a big accomplishment, but then the lender starts talking about closing costs! What does that mean? What are closing costs and who pays them?? Is that really something a buyer has to pay?
What’s included with closing costs?
The closing costs when buying a home consists of several different expenses. The actual closing costs are related to the cost of obtaining the loan and includes the lender origination fee, appraisal fee, credit report, flood certification, tax service, attorney fees, lender’s title insurance, and a fee to transfer the deed after closing.Then, there are pre-paid expenses that get lumped in with closing costs. These is money your lender needs to collect in order to pay your property tax bill and insurance bill.
Who should pay closing costs?
This is a topic that causes a good bit of confusion. Seller’s don’t want to pay the buyer’s closing costs and some buyer’s think it should be a seller’s expense. It is a buyer’s expense but if a seller agrees to pay the closing costs, it doesn’t affect the seller. It’s important for everyone to understand how it works. An example would be a sales price of $100,000 with the seller paying $3,000 in closing costs for the buyer. This would be the same as a $97,000 offer to the seller since the $3,000 comes out of seller proceeds at closing. It effectively allows the buyer to reduce the amount needed for closing, basically “financing” the closing costs by paying more for the home.
Make sure you get the full benefit
When making an offer, an amount must be filled in on the contract. Sometimes buyers want sellers to pay 1/2 of the closing costs. Unfortunately, it’s not advisable for a seller to agree to that without knowing exactly how much 1/2 would be. Checking with the lender to get a good estimate is the best way to go. And, it’s better to ask for a little less than the lender estimates, in case the closing costs are less. If the seller has agreed to pay more, the excess stays with the seller.