Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question. Joseph from Milwaukee, WI writes: I’m writing because I’ve been reading your column and your answers seem to be straightforward and unbiased. My wife and I bought our first home almost 11 years ago and the family has grown. We need a bigger home and believe the market is at the right point for us to start looking. I remember having sticker shock from all of the closing costs that were added in when we bought our first home. Is there anything we do to reduce or eliminate these costs this time? Thank you.
Answer. Thanks for writing Joseph. The good news for you is there are actions you can take to reduce closing costs. However, as it is with many things in real estate, the answer to your specific question depends on your specific circumstances. For that reason, I did some research into the local Milwaukee market. There is good news from your perspective because your local market is mostly a buyers’ market. This can benefit you in negotiating some closing costs with the seller. From a broad perspective, a buyer’s market exists when homes for sale stay on the market longer, price reductions occur more frequently, and some homes have sold for less than the original listing price.
Milwaukee had an increase in days on the market back in March (118 days) but that came down to 65 days in August. Home prices have been on the rise for several years and went up a little over 10% this past year. However, the general forecast is price increases will slow to less than 7% over the coming year. Recent data shows that on average, houses have sold for slightly less than the original listing price (about $2,000 less). In general the market favors the buyer slightly more than the seller.
Specific to closing costs, these can be dependent on the loan you apply for, as well as what you can negotiate with the lender, the seller, and even the timing of when the deal closes. There are also regional and local traditions for which costs the seller traditionally pays and which the buyer pays. These are traditions rather than legal requirements. That means they can be negotiated but you can expect push back from the seller and even the brokers involved in the deal.
Common closing costs include broker’s fees, surveyors (in some states), home inspection, appraisal, and attorneys (in some states). Lenders charge application, processing, and credit report fees. If you decide to pay points to lower your mortgage rate, then that expense will be due at closing as well. Some fees that can be lowered by choosing a specific closing date include prorated loan interest, escrow property taxes, HOA fees, and advance homeowners insurance. And the list goes on.
Typically, buyers will pay between about 2% to 5% of the purchase price of their home in closing fees. Joseph, this means if your next home costs $150,000, you can expect to pay between $3,000 and $7,500 in closing costs if you do nothing to reduce them. On average, buyers pay roughly $3,700 in closing fees, according to recent Zillow data.
A buyer can expect to receive a Good Faith loan estimate that includes estimated closing costs within three days after submitting a formal loan application. You may want to shop around for a lender before submitting a formal application and paying the application fee. You can shop around by calling lenders and asking about their fees. Typically, you are looking to eliminate or reduce high lender administrative fees, mailing, and courier costs. These and other fees are sometimes referred to as “garbage fees” and are often completely arbitrary amounts.
Something else you may want to shop for is a “no-closing cost mortgage” in which you don’t pay any of the closing costs when you close on the mortgage. But that doesn’t mean you won’t pay the fees eventually. Almost always, the lender wraps the fees into the amount of money borrowed. That means you’ll be paying interest on the fees. You end up paying the full fees plus interest either when you sell the house and repay the loan balance or as a portion of your monthly payment until the loan is paid off.
Who pays almost all of these fees is negotiable with the seller. Whether you are in a buyers’ market or seller’s market has a big influence on how willing a seller is about assuming some or all of these fees. When there are multiple purchase offers on the table, the seller is not likely to negotiate. If it is a buyer’s market, most sellers will be expecting to negotiate at least the purchase price and astute buyers will try to also negotiate closing costs. There are two primary negotiating strategies. First is directly negotiating who pays the costs at closing. Once these have been negotiated, these need to be properly recorded on the official Closing Disclosure (example: https://www.consumerfinance.gov/owning-a-home/closing-disclosure/). You’ll receive this at least three days before the closing date. Be sure to review it carefully for all fees that will be included as well what the buyer will be paying and what the seller will be paying. Also, ask the lender to explain each line item on your closing costs and why it is needed (consider doing this when you receive the Good Faith loan estimate).
The other way you can negotiate these costs with the seller is to have them included in the purchase price. In that case, you could be paying more than the original listing price or you could have the listing price include all closing costs. This is not much different from a “no-closing cost mortgage.” Again, you’ll be paying the closing costs through your monthly mortgage payment. Something to keep in mind if you wrap closing costs into the mortgage amount is that the home will need to appraise at a value that includes these costs.
Picking your closing date is another place you can reduce some closing costs. Mostly for fees that accrue such as loan interest, property taxes, and HOA fees. If you close near the beginning of the month, most lenders require you to prepay the interest that will be owed at the end of the month. This can amount to almost a full mortgage payment. If you close near the end of the month, you’ll pay only a few days of interest before the month ends. Property taxes and HOA fees typically are paid monthly into an escrow account that the lender then uses to pay the fees when they come due. When you close determines how much of these fees the lender requires you to pay at closing rather than accumulating them monthly into the escrow account. You can ask your lender how to minimize this cost by choosing a specific closing date.
Joseph, I know this is a lot to wrap your brain around and the truth is this is only the tip of the iceberg of what can be negotiated regarding closing costs. Other than a few government fees, almost everything on the Closing Disclosure is negotiable. Both for the amount of the fee and who pays it. I hope this helps and that you find success reducing your closing costs.
I’m sure other readers have had good experiences reducing closing costs. Please share by writing a comment.
Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].
Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 12 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.