Closing Costs: How They Affect Your House Price & 3 Ways to Reduce Them

When you buy a house, you need to bring more than just your down payment to the closing table: you must cover closing costs for your lender to provide loan services.

Many first-time homebuyers misjudge the amount they will spend on closing expenses.

Some people might not be aware that there are strategies to reduce your costs.

Closing expenses might be a little tricky to understand. In this article, we'll give you an overview of everything you need to know about closing costs before you finalize your loan, plus a few tips on how to limit what you’ll pay.

What are closing costs?

Closing costs are fees paid at the closing of a real estate transaction.

They are processing fees you pay to your lender to finalize your mortgage application.

Closing costs may include:

• loan origination fees
• taxes
• appraisal fees
• deed recording fees
• title searches
• title insurance
• surveys
• discount points
• credit report charges.

Gifts of equity can also incur some closing costs. 

How much are closing costs?

Closing costs are usually 3 – 6% of the loan amount, depending on the state.

Let's say you take out a mortgage worth $250,000, this means you would pay closing costs between $7,500 and $15,000.

The amount you'll pay at closing will largely depend on your state's real estate transfer tax rate and the type of loan you take. Transfer taxes are a big factor and are usually a source of incurring huge closing costs, especially in states with high transfer taxes.

Here's a rundown of closing costs by each state according to data collated by Closingcrop in 2021.

Who pays closing costs?

Closing costs are covered by both buyers and sellers.

But the majority of them are generally paid by the buyer. Seller concessions (closing cost assistance) can be negotiated with a seller. If you fear you'll have difficulties coming up with the money you need to close, seller concessions might be quite beneficial.

There are restrictions on how much a seller may contribute to closing fees.

Sellers may only contribute a certain amount of your mortgage value, based on the loan type, occupancy, and down payment.

Here's a list of seller concessions based on the loan type.

Conventional Loans

For primary residences:

Down payments of 25% or more: 9%

Down payments of 10 – 24.99%: 6%

Down payments less than 10%: 3%

For second homes:

Down payments of 25% or more: 9%

Down payments of 10 – 24.99%: 6%

For an investment property, the maximum amount of seller concessions for any down payment is 2%.

FHA Loans

The limit a seller can concede on FHA loans is 6% based on whichever is lower between the appraised value or purchase price.

VA Loans

Up to 4% of the purchase price or appraised value (whichever is lower) is accepted for seller concessions in VA loans.

Sellers can contribute an unlimited amount of funds for things like discount points, origination costs, surveys, appraisal, and credit report fees. 

How Seller Concessions Works

Consider that you obtain a $250,000 conventional loan.

The seller might only contribute a maximum of 3% ($7,500) toward your closing expenses if it's a conventional loan and you made a down payment of less than 10%.

The seller can contribute up to 100% of the closing cost value if they total less than 3% of the loan value. This implies that the seller may only give up to $5,000 if your closing expenses for the same loan are $5,000. These restrictions aid in preventing fraud.

3 Ways to Reduce Closing Costs

Here are some ideas you may utilize to reduce the amount you'll have to pay at closing.

Compare lenders.

You get to pick the mortgage provider you wish to deal with as the buyer.

Don't be reluctant to look around for loans for a while. Ask about the costs that various competing loan providers levy by getting in touch with them. For reduced total closing expenses, pick a lender that provides reasonable fees and competitive interest rates.

Request that the seller contributes.

Your seller could agree to assist you with covering your closing expenses if you reside in a buyer's market.

The vendor and you both benefit from this transaction. At the closing table, you will pay less money, and your seller will sell their house more quickly.

Make sure you understand the maximum contribution your vendor may make in light of the sort of loan you have, then ask for a concession. Be cautious that asking for too many concessions may result in your offer being rejected if the market is biased in favor of the seller.

Consider rebates or incentives.

For qualified borrowers or first-time homeowners, certain banks could provide rebates.

When you are looking around for a mortgage lender, it is worthwhile to inquire about these options.

The Bottom Line on Closing Costs

You cannot avoid closing expenses when purchasing a property.

If you take the initiative to compare lenders and carefully review your closing disclosure and loan estimate, you might significantly reduce those costs. Set aside enough cash for closing fees as you begin saving for a down payment.

Keep in mind that some regions of the nation have more expensive closing charges than others. Be your best supporter beyond anything else. Ask lenders to describe their costs when you compare lenders, and if feasible, attempt to bargain them down.

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