Buyer Resources - Articles

Buying Your Home - Closing Costs



What are closing costs?
In a real estate transaction, there are both Buyer’s and Seller’s closing costs. The buyer’s closing costs include fees for services, taxes or special interest charges that surround the purchase of a home. They include fees such as escrow, title insurance, document preparation fees, lender fees (processing, underwriting, loan origination fee, points, etc.), home inspection, appraisal, credit check, termite report, etc. Buyers also usually have prepaid closing costs which include prepaid interest, taxes, insurance, and sometimes homeowner’s association fees. Unless, these charges are rolled into the loan, they must be paid when the home purchase transaction is closed.


Why do I need a title report?
As much as you as a buyer may want to believe that the home you have found is perfect, a clear title report ensures there are no liens placed against the prior owners or any documents that will restrict your use of the property.  A preliminary title report provides you with an opportunity to review any impediment that would prevent clear title from passing to you.  When reading a preliminary title report, it is important to check the extent of your ownership rights or interest. The most common form of ownership interest is "fee simple" or "fee," which is the highest type of interest an owner can have in land.  Liens, restrictions and interests of others excluded from title coverage will be listed numerically as exceptions in the report.  You also may have to consider interests of any third parties, such as easements granted by prior owners that limit use of the property. Some buyers attempt to clear these unwanted items prior to purchase.  A list of standard exceptions and exclusions not covered by the title insurance policy may be attached. This section includes items the buyer may want to investigate further, such as any laws governing building and zoning.


Who pays the closing costs?
Buyer's closing costs are either paid by the home seller or home buyer. It often depends on local custom and what the buyer or seller negotiates. Keep in mind the fact that sellers have their own closing costs to pay, including the real estate broker fee, which usually runs about 6% of the sales price. When asking a reluctant seller to pay your closing costs, if you know the home is reasonably priced, it helps to raise the price by the amount you are asking them to cover. You would basically be financing your closing costs, vs. paying them up front.


How can I save on closing costs?
Studies show that the closing costs, which can average around 3.5 percent of a total home purchase price (depending on when you close escrow), are often more costly than many buyers expect. But there are some ways to save:
* Negotiate with the seller to pay all or part of the closing costs. Depending on buyer competition, due to supply & demand of homes, asking a seller to pay your closing costs may lessen the chances of getting your offer accepted. Note: the lender must agree to this as well as the seller, as some types of financing limit the amount a seller may contribution toward buyer’s closing costs.
* Get a no-point loan. The trade-off is a higher interest rate on the loan and some of these loans may have prepayment penalties. But buyers who are short on cash and can qualify for a higher interest rate find a no-point loan helpful, as they significantly cut their closing costs.
* Get a no-fee loan. Usually, though, these fees are wrapped into a higher interest rate, though it will save you on the amount of cash you need upfront.
* Get seller financing. This kind of arrangement usually does not entail traditional loan fees or charges, but is not too common. Most often, sellers will need the funds from the sale of their current home in order to purchase their next one.
* Rent the property in which you are interested with an option to buy. That will give you more time to save for the upfront cash needed for the actual purchase. It is rather difficult to find homeowners that are able to do a “rent-to-own” transaction, as most sellers are depending on the proceeds from the sale of their current home in order to obtain their next home.
* Compare two to three lenders. First off, make sure they are reputable. Each direct lender and mortgage broker has their own fee structure. Ask family, friends, co-workers and your real estate professional for recommendations. Call around and compare service and fees before submitting your final loan application.

Where do I get more information about closing costs?
For more on closing costs, ask for the "Consumers Guide to Mortgage Settlement Costs," Federal Reserve Bank of San Francisco, Public Information Department, P.O. Box 7702, San Francisco, CA 94120 or call (415) 974-2163.


Dina Romero
Dina Romero
Broker Associate