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Purchasing a home can be very exciting and stressful at the same time. There are many variables, unknowns, and myths surrounding buying a home that can easily overwhelm most first-time home buyers. First among that list tends to be closing cost, who pays them, and how much are they. Read on to learn all the facts about closing cost, and how to avoid paying those annoying Junk / Garbage fees.
|Written By:||Scott Hodge
Realtor ® / Veteran US Navy
Buyer Closing Cost Deciphered
“Closing Cost are defined as the expenses buyers and sellers normally incur in the transfer of home ownership over and above the cost of the home.”
In San Diego, the buyer and seller negotiate the allocation of the closing costs in the Residential Purchase Agreement / Purchase Contract. It is important to note that who pays what cost in a home sale / purchase is always negotiable. For the purpose of this discussion we are going to focus on the cost normally incurred by the buyer here in San Diego County.
How Much Can a Buyer Expect to Pay for Closing Cost
Closing cost for home buyers generally fall between 2 to 4 percent of the purchase price of the home and can vary greatly depending on the pro-ration of property taxes, pre-paid insurance, and lender origination fees.
The total closing costs to purchase a $500,000 home could cost anywhere from approximately $10,000 to $15,000 or more. These funds typically cannot be borrowed because that could raise the buyer's debt to income ratios to a point where the buyer may no longer qualify for a loan.
What About Those Zero Closing Cost Advertisements
Remember nothing in life is free, however, your lender may be able to pay some or all your closing cost for you by charging you a higher interest rate. Keep in mind you are in fact paying the closing cost by taking a higher interest rate and a higher monthly mortgage payment for the life of your home loan! *It is important to discuss the pros and cons of this strategy with a lender that you trust!
Some Realtors® and Brokerages will offer closing cost incentives that pay a large portion of your closing cost for you as well.
What are the Buyer’s Closing Cost Exactly
Buyers closing cost are broken down into two separate categories. Recurring and Non-recurring closing cost.
Buyer’s Non-Recurring Closing Cost
Non-recurring closing cost are fees that are paid once for the initial home purchase and never paid again. These fees are one-time charges for items such as:
Buyer’s Recurring Closings Costs
Recurring closing costs that you will pay annually throughout the life of your home loan and as long as you own your home. These fees are often paid in advance of closing for prepaid premiums and establishing impound/escrow accounts. They include such fees as:
The time of the year that you close will dictate how much pre-paid taxes, insurance, and premiums your lender will collect and hold in an impound account for you. Not all loans require an impound or escrow account, but typically loans with smaller down payments of less than 80% of your purchase price will demand an impound/escrow account.
Seller & Realtor® Credits
As we discussed earlier who pays what fees and closing cost are always negotiable. Sometimes sellers will offer a closing cost credit in lieu of making repairs discovered from the buyer’s home inspection.
In addition, your Realtor® may offer a credit towards your closing cost as an incentive to work with them.
It is vitally important to obtain your lender’s approval for any and all closing cost credits. Most lenders will limit the total credits a buyer can receive to 4 percent of the total purchase price. Imagine the disappointment with negotiating a $50,000 closing cost credit from the seller and having the lender only approving $20,000. It is important to ensure your Realtor® and lender are working closely together and communicating effectively so this does not happen during your home purchase!
Watch Out for the Garbage / Junk Fees
"Garbage fees," also known as "junk fees," can be tacked onto some mortgages by lenders or added into your home purchase by a real estate agent who knows many buyers wont pay close attention. There is no way to completely avoid all of them, but you can often minimize them by carefully analyzing your Closing Disclosure and Settlement Statement.
Look out for excessive processing and documentation fees in the following five categories:
• Interest rate buy down fee
• Application fee
• Underwriting fee
• Loan processing fee
• Mortgage rate lock fee
Look out for these three Junk / Garbage fees sometimes added by real estate agents:
• Transaction fee
• Service fee
• Transaction Coordinator fee
Sometimes real estate agents will add these 3 fees to your home purchase and then "Discount" them half off for "Friends and Family". At Homeport Residential we treat every client like family and we will never charge a Junk or Garbage fee! In fact we give all our clients cash back at closing.
If any of the above fees seems to be unusually high, or out of place, ask about them, as they can often be negotiated. This advice applies to other fees as well. If it looks funny, ask about it. Often, the mere act of questioning the fee will result in the fee being lowered or eliminated.
Disclaimer: You should always obtain professional advice if you are considering purchasing or selling real estate in California, or any other state. We are not Attorneys and cannot provide legal advice. We are not Accountants or CPAs and cannot provide tax or financial advice. We are not licensed home inspectors or licensed home appraisers. The articles written and opinions expressed on San Diego Homeport, and Homeport Residential are entirely our own and are just that, our opinions. You assume full responsibility for the use of information provided on this site. The information presented here is subject to change and may not always be accurate due to changing market conditions. The information should not be relied upon as legal or financial advice.