An important part of the homebuying sales process and sales contract is the closing costs. Few first time homebuyers realize that closing costs can be as much as 15 percent of the sales price and many lenders require you to pay for the closing costs upfront. While some lenders can roll the closing costs into the loan package, knowing what these are ahead of time may help you plan your budget better and even negotiate down the final price so that you can afford the total closing costs as part of the deal.
Lenders base their maximum loan offer amount on the sales price and not on the net price of the property, (that is sales price less closing costs). You can make a deal with your Realtor and lender to find the best way to allocate closing costs depending on your budget.
Closing costs can be best understood by first being aware of the costs that buyers and sellers typically assume. Barron’s ‘Smart Consumer’s Guide to Home Buying’ clarifies that closing costs are not dictated by law but rather by real estate convention and whatever has been agreed upon in the contract.
The buyer is typically responsible for all fees and discount points of the loan. These are often added at the end of the contract by the lender, and vary significantly by financial institution. Some bankers will waive this fee for preferred customers or as part of your contract, but it’s important to get an accurate estimate of this as early as possible during your loan financing process.
Buyers also pay for the insurance premium of the homeowner’s title. Buyers usually have to pay the premium first before proceeding with a formal home buying agreement. It is advisable to pay for this upfront so that you won’t have to include this cost in your loan package. Look for the best homeowner’s insurance policy rates and deals as the premium varies between each insurance company.
The following costs are usually the responsibility of the seller. Commissions on sales – commissions are given to agents of both the buyer and seller. Commission payouts are set depending on the buyer’s and seller’s agreements with their respective agents.
Home Inspection Costs – All home inspections and other property testing costs should be shouldered by the seller before the home is actually purchased.
Insurance of the Title – Title insurance costs are normally listed as part of closing costs and are the responsibility of the seller. New homebuyers commonly make the mistake of assuming that they are responsible for paying any obligations with the title company.
Recognizing each component of the closing costs can give any homebuyer an accurate estimate of the final contract price. You can ask for an estimate from your lender way ahead of the signing date as most are willing to breakdown all these costs and explain how they fit in your loan package.
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