Knowing how to negotiate closing costs can save you money. With the down payment, prepaids, and cash reserves required for buying a house, every cent saved up counts.
While most line items on your Loan Estimate which list your closing cost t aren’t that much money individually, there’s a lot of them, so they add up. Some closing costs are negotiable within reason while others are not. Besides negotiating closing costs with your lender, you can also negotiate who pays closing costs: you—the buyer—or the seller.
Here, we’ll break down what closing costs are, who usually pays what, and how to negotiate closing costs:
- What are Included in Closing Costs?
- Who Usually Pays Which Closing Costs?
- Options for Negotiating Closing Costs
- Your Closing Costs Negotiation Checklist
What are Included in Closing Costs?
When you’re getting a mortgage, you’ll want a Loan Estimate which is an itemized list of all of your closing costs from your lender. The lender is required to provide the Loan Estimate within three days of taking the application. Get this list sooner rather than later so that you aren’t caught off guard with costs at closing time.
Besides closing costs, there are many other fees you’ll pay for at closing or will need additional funds for. What’s not included in your closing costs?
Real Estate Agent Commission
Real estate agents earn their living from commissions they get on selling houses. Usually, both the buyer’s real estate agent and the seller’s real estate agent each earn 3% of the sale price of the home. While real estate agents’ commissions are not considered a part of closing costs, they can be negotiated, so we will discuss it below. This applies if the borrower is selling a home or has signed a buyer broker agreement to purchase a new home.
Your down payment is how much in cash you’re putting towards the house, and is not included in your closing costs. The larger your down payment, the less money you’ll need to borrow, and the smaller your loan will be. How large your down payment is can also have an effect on your ability to negotiate closing costs with the seller, which we’ll discuss below.
Your Mortgage lender will require you to have a certain amount of cash reserves in your bank account when you get a mortgage. Mortgage lenders need to see that you have enough money saved up to pay at least a few months of your principal, interest, tax, and insurance on your mortgage on certain loan types. While this isn’t technically a cost you’re paying at closing, it is money you’re required to have, which increases your overall costs.
Prepaids are costs you pay in advance that go into your escrow account, a third-party separate account where funds are held to pay for . things like taxes, hazard insurance, private mortgage insurance, flood insurance ( if applicable) and special assessments. Because prepaids are costs you would pay later anyway, prepaids are not considered closing costs.
When you buy a house, you’ll have to pay for any of the utilities starting from when the house is officially yours when service is put in your name for the new billing cycle. This likely won’t cost more than a few hundred dollars at most and in some cases there may not be a fee. Utilities are not considered part of closing costs.
List of Closing Costs
Conceptually, it’s helpful to think of closing costs as all of the costs necessary for the creation of your mortgage. This includes things like paying your lender for the cost of all the fees required to create the loan.
Anything and anyone that helped make your mortgage go from a dream to reality will be owed in closing costs.
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There are many itemized factors that go into creating a mortgage loan, including:
Loan Origination Fee
The loan origination fee is usually 1% or more of your mortgage if one is charged If you hear your lender talking about “origination points,” they’re talking about the loan origination fee. The loan origination fee goes towards the administrative labor your lender put into your mortgage.
Unlike many closing costs, discount points are flexible. However, as the buyer, it may be in your best interest to buy more discount points, not fewer. The more discount points you pay at closing to buy down your rate, the lower your interest rate will be for the life of your mortgage. That means your monthly mortgage payments will also be lower indefinitely. Each point is a percentage of the mortgage amount, not the percentage of your interest rate. Consider prepaying interest this way to save down the road.
Your mortgage application fee typically shouldn’t cost you more than a few hundred dollars at the most. This also may be referred to as a “processing” fee by your lender.
When you buy a house, it’s in your interest and your lender’s interest to make sure the house is worth what you’re buying it for. The appraisal fee covers the cost of an appraiser, who determines how much your house is worth. The appraiser will look at the state of the house itself as well as similar houses in the area to determine its value. You can expect an appraisal fee to be between $500 to $700 dollars, and an appraisal will be required in most cases.
Credit Check Fee
Your Mortgage Consultant will do a hard credit check with credit bureaus to get a sense of how reliable you are at paying back money you’ve borrowed in the past. Your credit score is an important factor in determining how much money—if any—a lender will lend you. While most credit checks cost around $25, it’s not uncommon to see ones that cost closer to $70.
Lender’s Inspection Fee
This fee only applies to you if your house is brand new or is being built, and should cost somewhere between $150.00 to $175.00 Similarly to the appraisal fee, ensures the house is worth the money the lender is looking to let you borrow.
Mortgage Insurance Application Fee
This fee is like your mortgage application fee, except it’s an application for your private mortgage insurance, or PMI. This only applies if you’re required to get PMI, which will be the case if you get a conventional mortgage and put less than 20% down. If you’re getting an FHA loan, you’ll be paying an upfront Mortgage insurance premium and a monthly mortgage insurance fee, instead.
This fee only applies if your mortgage is assumable. An assumable mortgage would mean that you—the buyer—are taking over the seller’s existing mortgage, rather than getting a new one of your own. While most mortgages are not assumable, they can be beneficial to both the buyer and seller if the interest rate on the mortgage is lower than the current market interest rate.
Lender’s Attorney Fee
This fee only applies if your lender uses an attorney to complete the mortgage. It can cost anywhere from $200 to $500 or more. If your lender does not use an attorney, you may have to pay a “closing fee” or “escrow fee” to the escrow company who oversees the closing as a third party.
If a courier is used to deliver documents, there will be a small courier fee to cover the delivery cost.
Wire Transfer Fee
This would cover the cost of wiring money to your escrow account.
This is the price to lock in your interest rate. For longer lock in periods, you’ll likely be paying more. Make sure to clarify if your lock in is a float down lock in, meaning that your interest rate will lower if market rates go down during your lock in period.
When you buy a house, you’ll get an owners’ title policy —the legal documentation that proves you own the house. Some costs that come with transferring the title over from the seller to the buyer include:
The title search makes sure that there are no liens, unpaid property taxes, or anything else on the property that you’re buying. A title search gives you the peace of mind that you’re getting the house with a clean slate, and won’t have anyone knocking on your door later telling you that you owe them money from a past deal tied to the property. The title search will cost around a couple hundred dollars.
Title Insurance Fees
Title insurance fees vary by state. Title insurance will protect the homeowner in case any problems connected to the title of your property do pop up.
Your title documents will be notarized by a certified notary public. This will ensure all signatures on the document are legitimate.
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Government Recording and Transfer Fees
Government recording and transfer taxes are legal fees associated with your mortgage.
When you buy a house, your property and mortgage information will legally need to be filed at your local county courthouse. Recording fees are typically around $100.
When the title of a property is transferred, you’ll be charged transfer taxes, which vary widely by state.
Who Usually Pays Which Closing Costs?
Closing Costs the Buyer Pays
The buyer usually pays most of the closing costs. This is because most closing costs are associated with the creation of your new loan. Even when the buyer is taking over an assumable loan, there are still loan fee closing costs involved, and those are usually paid by the buyer.
Closing Costs the Seller Pays
The seller typically pays for the property transfer taxes. Some states, like Texas and Oregon, have no property transfer taxes. Other states, like Delaware and New Hampshire, have a property transfer tax rate of up to 4% on Delaware and $7.50 per thousand in New Hampshire, depending on your area, this could be a moot point or money saved for the buyer.
The seller also usually pays for the real estate commission for both the listing agent and the buyer’s agent. However, you could argue that the seller has included the real estate commission in the price of the home, which would mean the buyer is really paying for the real estate commissions in the end.
Options for Negotiating Closing Costs
While it’s customary for the buyer and seller to each pay certain closing costs, closing costs are up for negotiation—to a point. The buyer can also negotiate select closing costs with the lender to lower the overall amount of closing costs that the buyer and seller must cover.
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Interested party Contributions (Financing Concessions)
If you’re a buyer asking a seller to pay for some of the closing costs you would normally pay, you’re asking the seller to make a concession.
Financing concessions only make sense if the buyer has leverage. In other words, it can make sense for the seller to make concessions if it’s a buyer’s market. In a buyer’s market, the seller will have trouble getting their house sold. The seller may also be willing to make concessions to the buyer if they are in a hurry to sell their house and do not have a lot of buyers lined up.
If it’s a seller’s market and there are many potential buyers lined up willing to pay a high price, asking the seller to pay for some of the closing costs could lose you the house. Talk to your real estate agent to get their opinion before asking for seller concessions.
Seller Financing Concession Examples
You’ll want to be strategic if you make a proposal for seller concessions. The best way to negotiate seller financing concessions is to find out what’s important to them. For instance, if the seller is looking to close the sale as quickly as possible, they may be willing to pay a certain amount of the closing costs if you can close on the house quickly.
You should also be specific when making proposals for seller financing concessions. For instance, you can ask them to pay for the loan origination fee and offer a flexible move-in date to give them more time to move out of the house in exchange.
If you want to lower your closing costs but aren’t in a position to be asking the seller to cover for them, you have another option. If you ask the seller if they’d be willing to raise the price of the house, this would increase your loan amount. Then, you could pay back the seller for any closing costs that they covered immediately afterward.
Similarly, if most bids for the house are under the sale price, you could offer to pay the full sale price in exchange for the seller paying the closing costs.
While seller concessions can include paying for closing costs, you can also ask for other seller concessions instead. For instance, you could request the refrigerator, washer, and dryer stay with the house.
However, be aware of asking your seller for too many things. If you ask the seller to include appliances that they were not planning on originally including and you’re asking them to pay a portion of your closing costs, they might want to make a deal with another buyer.
Seller Paid Closing Cost Maximums: Conventional Mortgages
Before you ask the seller to pay for a portion of the closing costs, it’s important to know that there are restrictions on how much the seller is allowed to pay. These rules are set by Fannie Mae and Freddie Mac, not your lender, so they are non-negotiable.
For conventional loans that are investment properties, the seller can contribute a maximum of 2% towards costs. For conventional loans that’ll be your main residence or second home, the maximum seller contribution depends on how large your down payment is:
Maximum Seller Paid Costs For Conventional Loans
|wdt_ID||Down Payment||Max Seller Paid Costs|
|1||0% - 10%||3%|
|2||10% - 25%||6%|
Seller Paid Closing Cost Maximums: VA, FHA, and USDA Loans
Because VA loans, FHA loans, and USDA loans are meant to help Americans become homeowners, they both give leniency to buyers when it comes to closing costs.
While no down payment is required for VA loans, closing costs still need to be paid. Those taking out a VA loan have the option of getting seller or lender credits to help cover closing costs. The seller is also allowed to pay all closing costs of the house’s price or value whichever is less.
Similarly to FHA loans, USDA loans allow the seller to contribute up to 6% of the sales price towards the buyer’s closing costs.
Negotiable Closing Costs
The buyer can negotiate with the seller on closing costs, but also with the lender. While most closing costs are not negotiable, there are some closing costs you can reasonably negotiate with your lender:
Because you’re basically prepaying interest with discount points, they’re a closing cost that you don’t have to pay. However, if you plan on owning the house for five years or more, it’ll likely be in your best interest to pay some discount points.
Loan Origination Fee
The loan origination fee, or mortgage points, can be negotiated. If your lender wants to remain competitive, they’ll be open to negotiating this fee. If you are a high-risk borrower though, this fee could be more difficult to negotiate.
Application, Credit Check, And Processing Fees
The cost of these fees can be negotiated with your lender since they can be wrapped into the loan origination fee. It’s possible to get some of these fees waived altogether.
Negotiating Realtor Commissions
If you’re only buying and not selling, realtor commissions aren’t something you’ll have to worry about. But if you’re selling a house and buying one at the same time using the same agent, you can request a discount on their commission. While not technically a closing cost, the seller can negotiate realtor commissions to help with the out-of-pocket costs that come with closing on a mortgage.
Typically, real estate agents get 6% of the sale price of the house, split between the buyer’s agent and the seller’s agent. To help encourage a discount, you could offer to give your realtor referrals to send them more business in the future.
Closing Cost Assistance Programs
If you are a low-to-moderate income borrower, you may qualify for down payment and closing cost assistance programs. Closing cost assistance often comes as a grant or deferred forgivable 2nd mortgage that you won’t have to pay back if you’ve followed the grant’s stipulations. It’s common that you’ll need to have lived in the house for three to five or more years, and that the house is not sold or refinanced during that time.
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Your Closing Costs Negotiation Checklist
Now that you know all about closing costs and your options, here’s what to do:
Bring Up Closing Costs With Your Lender Early
If closing costs are a concern, bring them up early with your lender when applying for the loan. Your lender wants you to be able to close on the house and will help you go over your options, including closing cost assistance programs.
Identify Whether You’re In A Buyer’s Market or Seller’s Market
If it was tough to get an offer accepted on a house from steep competition, you may not have much room for negotiation with your seller. If you’re a low-risk borrower, you may have still have some wiggle room to negotiate some closing costs with your lender though.
Identify Your Closing Cost Options With Your Mortgage Type
If you’re in a good place to be making some negotiations on closing costs with the seller, take a look at how much the seller could legally put towards your closing costs based on your mortgage type. If you have a conventional mortgage, the seller will be able to pay more in closing costs the larger your down payment.
Determine Which Closing Costs Are Negotiable For Your Situation
Write everything down that may be negotiable. You’ll want to look at the fees your lender is charging, what the seller is including in the sale of the house, and determine how much your real estate agent is expecting in commissions if you’re also selling.
If you’re asking the seller to make concessions and you don’t want to lose the house, work with your seller to make sure you’re meeting them in the middle. Likewise, don’t try to cut your realtor’s commission unreasonably if you want to keep your real estate agent on your side. There should be at least some fees your lender is willing to negotiate or wave, but some more than others depending on your trustworthiness as a borrower.