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How to Negotiate Closing Costs

Looking to reduce your closing costs? Learn about your options for negotiating, reducing, or eliminating your closing costs entirely!

Closing costs refers to all of the costs it takes to get a mortgage aside from the price of the home itself. Closing costs vary but can include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed-recording fees, and credit report charges. Aside from those, you’ve also got prepaid costs that recur over time, such as property taxes and homeowners’ insurance.

It may seem like a lot, but in general, closing costs can be broken down into four main categories: commissions, loan fees, title charges, and government recording/transfer fees.

Who Pays Closing Costs?

Most closing costs are typically paid by the buyer, who will pay around 2 to 5% of the purchase price in closing costs. Closing costs do differ by location, so the costs in your area may vary. Although the buyer is responsible for paying the closing costs, you can negotiate for the seller to contribute towards the closing costs as well. First, you will need to determine how much you need.

comic panel-like infographic showing where closing costs go

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How to Estimate Closing Costs

At the beginning of the loan process, your lender will send out a Loan Estimate which includes a closing cost estimate for your loan. Once your loan is approved, you’ll receive a Closing Disclosure which also includes a breakdown of your closing costs. Lenders are legally obligated to provide these documents so that you know how much the loan will cost.

We recommend you hold onto the documents as they are evidence of your loan, but if you do misplace any documentation, you can ask your lender for copies directly. With On Q Financial you have access to the Simplicity app which allows you to view your estimated loan costs from your phone at any time.

Can you Negotiate Closing Costs?

Yes, you can negotiate closing costs. In fact there are quite a few opportunities to lower closing costs throughout the mortgage process. Whether or not it’s a good idea to negotiate these costs largely depends on the current market. In a buyer’s market, you have the advantage for negotiations because there is less competition for a house.

Aside from negotiating the closing costs themselves, you have a few options when it comes to paying for your closing costs.

  • You can negotiate with the seller or other parties to reduce the price saving you enough to cover the closing costs.
  • Many assistance programs include closing costs, find out if you qualify.
  • Some lenders will allow you to roll your closing costs into your loan so that you can pay them over time along with your mortgage.

Realtors and agents can be a big help in figuring out which option is best for you, however, they typically do not cover any closing costs themselves contrary to what you may have heard.

How to Determine Which Closing Costs Are Negotiable

Most closing costs end up being between 2-5% of the purchase price. Some the fees and commissions that make up those closing costs are not negotiable, however, some are. To find out exactly which costs to negotiate in your case, you should talk to your lender.

Negotiable Closing Costs During a Home Purchase

While you may be able to get a better price by negotiating with your seller or lender, let’s look at some of the fees that are not negotiable.

  • Title Fees
  • Courier Fees
  • Tax Service Fees
  • Recording Fees
  • Appraisal Fees (however, make sure the price makes sense for your area)

Although that seems like a lot of fees that you can’t negotiate, there are still some fees that you can avoid.

Buying down your rate refers to paying what are called “discount points.” These are essentially prepaid interest on your loan. You agree to prepay some interest in exchange for a lower interest rate. Under the right circumstances, discount points can definitely save you money, but while it sounds good, discount points are not always a good deal. Speak with your lender to find out if this is a good fit for you.

Your Loan Estimate and Closing Disclosure will also include a list of charges. If you are so inclined, you can shop for some of the vendors listed such as title companies and home inspectors. Just keep in mind that whatever vendor you pick will still need to draw up a contract and coordinate with your lender so be sure to hustle when you receive your Loan Estimate.

Real estate commissions vary between realtors meaning there is no “common price.” Part of the reason for this is the fact that you can negotiate commission rates with your realtor. Be upfront when you select your realtor and know what you want from your realtor. Remember, you get what you pay for, and a realtor is an invaluable member of your mortgage team. If you’ve found the right real estate agent for you, it’s best not to overdo it on the negotiations.

How to Negotiate Closing Costs With the Seller

One of the most important ways you can negotiate your closing costs is with your seller, but remember that it depends on both your position and market conditions. It’s also important to keep in mind that closing cost negotiations will be written into your contract, so be sure to bring it up early.

Sellers are able to help cover your closing costs, but there is a maximum. This is usually 3-4% of the loan. There are a few ways to go about this.

You can choose to pay more for the home, and have the seller pay your closing costs. This is similar to rolling the closing costs into your loan, but in this case, you may not have to pay the full amount of closing costs if you can negotiate on the price.

We recommend letting your agent handle communication with the seller. By leaving all face-to-face communication to your agent, not only will you avoid making some critical mistakes, but you will also be able to avoid looking too enthusiastic about the house.

It’s good to know if you have some leverage for your negotiation.

  • Is the seller trying to close early?
  • Has the house been on the market for a while?
  • Are you offering the best price?

Your agent will help you answer these questions if you are unsure, but the most important question is, “what is the seller’s motivation?”

Once you’ve reviewed with your agent what kind of leverage you have, you can pry further to find out the seller’s motivation. Question the seller (through your agent, of course) about why they are moving. Find out the history of the home to see if that may be a reason. You can learn a lot about the seller’s motivation by starting with a low-ball offer. Their reaction can be an indicator of how ready they are to sell and put you in a great position in terms of leverage. However, this is also a risk, since it may insult the seller, and they may decide they do not want to sell to you. Consider how much you want the home before taking this route and consult with your agent.

Closing Cost Maximums

The maximum amount a seller can contribute towards your closing costs largely depends on the mortgage program you have chosen. If you have questions or are unsure about which program you have, your mortgage consultant will be able to help.

Before you ask the seller to pay for a portion of your closing costs, it is important to know that there are restrictions on how much the seller is allowed to contribute. These restrictions are set by Fannie Mae and Freddie Mac, not your lender, so they are non-negotiable. On conventional loans for investment properties, the seller can contribute a maximum of 2% towards closing costs. If the conventional loan is for a main residence or second home, the maximum depends on how large your down payment is.

Because the purpose of FHA loans and USDA loans is to help Americans become homeowners, they are a bit more lenient when it comes to closing costs. FHA and USDA loans allow the seller to contribute up to 6% of the sale price towards the buyer’s closing costs.

With VA loans there is no limit to the amount a seller can contribute to closing costs. VA Loans also allow the seller to pay sales concessions. These are anything added to the transaction for which the buyer will not have to pay, and the seller is not required to provide. Although there is no limit on closing costs, that does not include seller concessions which have a limit of up to 4% of the sale price. However, this does not exclude discount points.

Here are some common seller concessions you may come across:

  • Payment of the buyer’s VA funding fee
  • Prepayment of the buyer’s property taxes and insurance
  • Gifts such as a television or microwave
  • Payment of extra points to provide permanent interest rate buydowns
  • Provision of escrowed funds to provide temporary interest rate buydowns
  • Payoff of credit balances or judgments on behalf of the buyer

Other Ways to Reduce Closing Costs

If negotiating lower fees and commissions is not an option, you might want to consider some alternatives for affording closing costs. These opportunities can definitely help you afford your closing costs, but some of them can come with a downside.

Depending on your income level, you may qualify for down payment assistance programs that also cover closing costs. Most assistance programs are available for low to moderate income borrowers. Which programs are available to you also depends on your location. Although there are thousands of down payment assistance programs across the country, most of them have requirements regarding the location of the purchase property.*

Closing cost assistance can also come in the form of a grant or a forgivable or low-interest second loan known as a “soft second”. Some of these loans are forgivable as long as you meet certain requirements such as not selling or refinancing the home for a specified time, usually 2-5 years.**

As mentioned briefly at the top of the article, you may be able to roll your closing costs into your loan. Your lender should give you this option as it is a very common practice amongst homebuyers. Be sure to discuss this option with your mortgage consultant if it is something you might want to pursue.

Government programs such as FHA, USDA, and VA allow you to pay your closing costs using “gift funds.” If you feel comfortable doing so, ask your friends and family for gift funds towards your closing costs. Since your lender requires you to disclose from where your down payment or closing costs are coming, you’ll need documentation of these gifts. This is usually a signed note stating that the gift does not need to be repaid. Just be aware that these gift funds are still considered taxable income by the IRS, so you will still have to pay taxes on them.

Closing at the end of the month is a good way to reduce your closing costs by reducing your accumulated interest. If you close at the end of the month, you have less time between when your loan begins accumulating interest and your first payment is due. Since this interest is charged “per diem,” reducing the amount of days to close would reduce the amount of interest due.

To get an idea of how much interest you are paying on the loan, and how much interest you could save per day, use the following formula.

  • Annual interest / 365 Days * days to closing

Your Closing Cost Negotiations Checklist

  • Bring Up Closing Costs with Your Lender Early

    The first step is speaking with your lender. If closing costs are a concern, bring them up early with your mortgage consultant when applying for the loan. Your lender wants you to close on your dream home and help explain your options.

  • Identify Whether you are in a Buyer’s Market or Seller’s Market

    If it was tough to get an offer accepted on a house with steep competition, you may not have much room for negotiation with your seller. Your real estate agent will be a valuable resource to determine the state of the market.

  • Identify Your Closing Cost Options with Your Mortgage Type

    If you are in a good position to start negotiations on closing costs with the seller, look at how much the seller can legally contribute to lowering your closing costs based on your mortgage program.

*  This material is provided for information and educational purposes only.
** Programs are subject to change without notice.

Looking to Purchase or Refinance?

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Continue on Your Home Buying Journey

You now have the tools to become a master negotiator! Your next stop on the Home Buying Journey is completing your mortgage process; however, before putting everything you’ve learned into practice, you should take a moment to consider your options. If you do not have a lender, you’ll want to read the following chapter to learn how to Compare Lenders.

Next Step: Compare Lenders