Closing Costs - Homebuyers Can't Afford to be Caught Off Guard
Buyers and sellers typically get a final "settlement statement" with the total closing costs (buyers) and net proceeds (sellers) about 3 days before closing on their home. Guess what, it's probably too late to do anything about it at that point if it's not what you had planned on.
So...that seems a bit late in the game to me. I personally don't want my clients to be stressed out about this 3 days before closing. So, here is an article to help you out if your agent and/or lender, aren't giving you very good direction.
FACT: It Costs Money To Buy A House
Granted, there are programs that can help with downpayment and closing costs and there are even more stories about "no money down programs" out there.
Lets be real, those programs are hard to qualify for, require higher interest rates and are usually "click bait" for unsuspecting buyers who are later told, "that probably isn't going to work for you, but..." If you can't afford a downpayment and closing costs, we need to work on reaching some financial milestones before we look at houses.
Okay, now that the uncomfortable part is out of the way, let's discuss how much you should be prepared for at closing.
Closing Costs, What Are Those?
(Let's be clear, this is never a good question to be asking 3 days before closing)
Closing costs, or settlement costs are the costs for settlement of your loan and closing the real property with the title company. The closing costs are what you pay your lender and the title officer for their work in the process.
For Buyers: closing costs include, the loan origination fees (your lender's paycheck), loan discount points, appraisal fees, title search fees, title insurance premiums, survey fees, transfer taxes, recording fees and credit report charges.
For Sellers: closing costs include, title search fees, title insurance premiums, survey fees, transfer taxes, seller concessions, recording fees and real estate commissions (the realtor's paychecks).
How Much Should I Set Aside?
For Buyers: Closing costs typically cost between 2.5% and 5% of the purchase price depending on what you have included or asked to be paid for by the seller. For instance, the appraisal is sometimes paid in advance and sometimes included in the closing costs. The good news is, you will receive an estimate of the costs from your lender within 3 days of your loan application being complete. That estimate is called an LE or loan estimate.
A lot of people are confused by the LE and are too embarrassed to ask questions about it. DON'T BE. Ask the questions until you understand.
For Sellers: Closing costs are about 7-8% of the purchase price depending on the contract terms. This is where a good agent can really save you money by negotiating the terms of the contract correctly and explaining the difference between offers received and the true net being received at closing. Not all offers are equal.
There are other costs to purchasing a home as well, that are not included in the closing costs and downpayment. Those costs typically include (this is not an exhaustive list mind you), the inspection -$400-$500; Earnest money - about 1% of the purchase price; and Appraisal -$300-$500.
We Can Help You
I hope this article has been educational & empowering for you. Buying a house is certainly not rocket science, but it can be confusing if you don't do it everyday like we do. Just be sure to ask questions, don't worry about making others feel awkward. If they feel awkward about explaining basic answers about closing costs then you should probably continue looking for someone else to represent you in the transaction.
Look, you're spending a lot of money; you're not buying sneakers (does anyone call them sneakers anymore?), it's okay if you have questions about the costs involved. You shouldn't settle for anything but answers to those questions.
For more information or to schedule a time to speak with us about any questions you have concerning closing costs, please contact us at 480.779.7761
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