Avoid Sticker Shock: Understanding Closing Costs

Kevin Guerrero
Published on December 9, 2016

 Avoid Sticker Shock: Understanding Closing Costs

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Ok, so you know you need a big chunk of cash to pay the lender for a down payment on that house you want to buy. You may even know about the earnest money deposit; that smaller chunk of money that your real estate agent told you about. And, sure, somewhere along the line the words “closing costs” may have been mentioned but when you see the amount necessary to close the loan, printed in black and white, it’s a whole other story for many homebuyers.

Wow!

As a rule of thumb, closing costs can run 2 to 5 percent of the loan amount. So if you’re using an FHA-backed loan, your closing costs may be comparable to your down payment. But I’ll venture to say that if you use a good lender — one that doesn’t charge a loan origination fee — you are looking at closer to 2%.

Let’s look at example – if you are obtaining a loan for $175,000 and you qualify for an FHA 5 percent down payment loan, you will be required to pay $8,750 as down payment. Your closing costs (as of Dec 2016) would come to approximately $4,200. You may not have realized that it would cost nearly $13,000 IN CASH to buy the house?

The truth is, many first-time buyers spend years saving up to pay the down payment while completely overlooking the closing costs.

What are closing costs?

When you pay your closing costs you’re basically paying for all of the services you received during the transaction. The seller, pays as well (e.g. real estate broker’s fee). Who pays for what at closing varies widely across the country but some items are standard. Here are the fees the buyer is customarily responsible for in Colorado Springs:

  • Home inspection (normally paid prior to closing at time of service)
  • Escrow (lump sum amount to pay for your homeowners insurance and property taxes)
  • Prepaid interest
  • Title insurance (for the lender)
  • CO State Tax Stamp Fee
  • Recording Fees
  • Notary fees
  • Survey
  • Credit report fee
  • Appraisal
  • Down payment
  • Tax Service Fee
  • Loan origination fee (find a lender that doesn’t charge this – see above)
  • Recording the deed

Lender disclosure requirements when it comes to closing costs

By law, lenders must disclose an estimate of loan costs within three days of the submission of a completed loan application. Then, three days before closing, the lender supplies the borrower with a Closing Disclosure. While the fees listed on the Loan Estimate may increase or decrease before closing, the Closing Disclosure is the final word.

It’s important to compare the two documents and look for changes. If you have any questions or concerns, call the lender immediately.

How to pay less at closing

Many sellers will agree to pay some (if not all) of the buyer’s closing costs. If you’re cash-crunched, let your agent know so he or she can negotiate with the Seller and the Seller’s agent on your behalf. In Colorado Springs it is not unusual to find the Seller paying $2,000 to $5,000 of the Buyer’s closing costs. Everything is negotiable. Buyer’s just need to be aware that asking the Seller for concessions may make their offer less competitive.

If you’re purchasing a home using the Veteran’s Administration (VA) mortgage, there are certain closing costs that you are not allowed to pay. Some of these include:

  • Attorney fee
  • Document
  • Escrow
  • Processing
  • Tax Service
  • Underwriting

 

Plus, there is no cap on how much of the closing costs a seller is allowed to pay. So, whether the seller pays them or the lender offers a credit to help pay for them, this is another money-saving feature of the VA loan.

The Consumer Financial Protection Bureau’s website has a lot of helpful information about the closing process, including a copy of the Closing Disclosure Form and an explanation of how to compare it to the estimate, and a closing checklist.

For people in Colorado Springs that choose to use a lender that does not charge an origination fee, here’s an example of all the costs associated with obtaining a loan and closing the deal…

Closing Costs

FHA closing costs

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 Avoid Sticker Shock: Understanding Closing Costs
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