You hear a lot about the down payment required to buy a home, but closing costs are also a significant consideration. You can’t eliminate all or even most of these costs, but there are steps you can take to reduce them.
You can do this by understanding how much closing costs amount to early in the purchase process.
Several factors go into determining your closing costs. These vary depending on the state in which the property is located, local market traditions and from lender to lender.
You can’t do much about the state requirements or local traditions, but you have choices based on the lender you choose: you can shop for your lender and negotiate some closing costs.
Ask About Costs When Prequalifying
When people first talk to a lender about prequalifying for a loan — not pre-approval — they tend to focus on what the lender wants rather than what they want as a borrower.
The lender wants to know about credit history, a down payment, job history and the like. As the borrower, you want to ask about closing costs that include interest rates, points and fees.
Interest rates and points are important, but your strongest negotiating position usually revolves around fees.
The costs you want to ask about are for document preparation, underwriting and origination, as well as third-party fees for title searches, title insurance, flood certifications, appraisals and anything else the lender wraps into closing costs.
Take a look at the second page of the official loan estimate for a good idea of what’s included in closing costs. Keep in mind that you can’t do much about government fees, which include recordings, taxes and other charges assessed by local and state agencies.
Still, shop with several lenders while prequalifying to learn what your closing cost options are.
Negotiable Closing Costs
Both broker and lender fees are negotiable, as these are controlled in-house by your broker and lender.
You can negotiate directly with them or even with the home seller to cover some of your closing costs.
What the seller covers is often a local tradition — but not a legal requirement.
Brokers and lenders can waive and reduce fees. You may need to talk with a manager, but fee reductions do occur. You can also ask the lender to contract with less costly third-party service providers.
You can request a zero closing cost mortgage in which all costs are rolled into the loan. You’ll eventually pay the costs over the length of the loan, but not upfront, when your other costs are already high.
Closing costs can include “garbage” or “junk” fees. These fees may or may not have merit. Studies show these often cannot be traced to a definitive cost for the lender. These fees have a history of being greatly inflated or completely irrelevant.
For instance, you might be charged $150 for courier fees that were never used, or which actually came to $25. The fee is avoidable altogether by using postal mail in a timely manner.
Always question fees with labels such as “administrative fee,” “application fee,” “appraisal review fee,” “document preparation fee,” “document review fee” and any other fees you don’t clearly understand or agree with.
These are all part of lenders doing business. You wouldn’t typically pay these for any other type of loan.
Keep a copy of the loan estimate you receive at the beginning of the process. Use it to compare with the final version known as the closing disclosure to ask about any unexplained changes. With a little effort on your part, you’ll know exactly how much your closing costs will be.