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How to negotiate closing costs with lenders?

Understanding Mortgage Closing Costs

Getting a mortgage is not free. Before getting the keys to the house, you will go to the closing table to sign the loan documents and the documents that transfer ownership of the home from the seller to you.

Throughout your home purchase, third parties, such as your real estate attorney and your mortgage lender, have provided services. Closing costs include the fees that these and other professionals charge for these services to complete the real estate transaction and your home loan.

Key points to remember

  • Closing costs are the costs and charges over the purchase price of the property, due to the closing of a real estate transaction
  • Both buyers and sellers may be subject to various closing costs.
  • Closing costs can include mortgage origination and underwriting fees, real estate commissions, taxes, insurance premiums, titles, and filing.
  • The law requires that closing costs be communicated to buyers and sellers in advance and agreed upon before a real estate transaction can be completed.

How much are the closing costs?

Closing costs generally range between 2 and 5% of the purchase price of the house. So, if you buy a house for $200,000, your closing costs can range from $4,000 to $10,000. Closing costs vary by state, type of loan, and mortgage lender. It is therefore important to pay attention to these fees. 

A lender is required by law to provide you with an estimate of the loan amount within three business days of receiving your mortgage application. This key document shows estimated closing costs and other loan details. While these numbers may fluctuate depending on the closing day, there shouldn’t be any big surprises. Three business days before the closing date, the lender must provide you with a closing declaration form. There you will find a column showing the initial and final estimated closing costs, as well as another column showing the difference if the costs increase. If you see new fees that weren’t in the original loan estimate or you notice that your closing costs are significantly higher, seek clarification immediately from your lender and/or real estate agent.  

Why is cost closing necessary?

You are probably already paying a down payment, not to mention an earnest money deposit to show your good faith and large mortgage payment for the foreseeable future. Why do you also have to pay closing costs?

A real estate transaction is a somewhat complex process, with many players involved and many moving parts. Some states (and some loan products) require certain inspections beyond the basic inspection which you pay directly to a home inspector of your choice. Then there are property and transfer taxes, as well as insurance coverage and various additional fees, discussed below.

Types of Fees with Closing Costs

All closing costs will be detailed on your loan estimate and a closing statement. Here are some of the standard fees you can expect to see (in alphabetical order):

Application fees

  • The lender may charge a loan application fee to process your mortgage application. Check with the lender before applying for a mortgage.

Attorney fees

  • Fees charged by a real estate attorney to prepare and review home purchase agreements. Not all states require an attorney to handle a real estate transaction.

Closing costs

  • Also known as escrow fees, they are paid to the party doing the closing: the title company, the escrow company, or an attorney, depending on state law.

Courier charges

  • If you are signing paper documents, these fees help expedite your transportation. If the closing is done digitally, you may not pay these fees.

Credit application fees

  • Fee ($15 to $30) charged by a lender to obtain your credit reports from the three major reporting bureaus. Some lenders may not charge this fee because they get a discount from credit bureaus.

FHA Mortgage Insurance Premium

  • FHA loans require an initial mortgage insurance premium (UPMIP) of 1.75% of the base loan amount payable at closing (or it can be rolled into your mortgage). There is also an annual mortgage insurance premium paid monthly which can vary from 0.45% to 0.85%, depending on the term and base amount of your loan.  

Flood identification and monitoring fees

  • Fees are charged to a licensed flood inspector to determine if the property is in a flood zone, which requires flood insurance (separate from your landlord’s insurance policy). Part of the fee includes permanent observation to monitor the progress of the flooding condition of the property.

Homeowners Association Transfer Fee

  • If you are buying a condominium, townhouse, or property in a development, you must join that community’s homeowners association. This is the transfer fee that covers the costs associated with changing ownership, such as documents. Whether the seller or buyer pays these costs may or may not be in the contract; you need to check in advance. 

Owner’s insurance

  • A lender typically requires prepayment of the first year’s homeowner’s insurance premium at the time of closing.

Lender’s title insurance

  • The one-time upfront fee is paid to the title management company that protects the lender in the event of an ownership dispute or lien that they could not find in the title search.

Lead paint inspection

  • Fees are paid to a licensed inspector to determine if the property is covered in hazardous lead-based paint.
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