Time to Relax, Right? You're at the closing table...time to put your John Hancock on some files, grab the keys, and enjoy your new home, right?
Well, at least that's what a first-time buyer should be doing at closing. Unfortunately, many first-time home buyers get the "Deer in the Headlights" syndrome once they see some of the unexpected closing costs. (Not my buyers of course! I'm talking about buyers on my listings)
Here's the typical mindset for some first timers:
Purchase $ - Loan $ = Out-of-Pocket $ While this is partially true, there are a number of other costs that must be identified and explained upfront.
Two areas that are particularly troublesome: title charges and loan expenses. Obtaining title insurance is part of purchasing a home (unless your paying cash and are brain dead). If a bank is lending money, there is no choice -- the purchaser must obtain title insurance for the benefit of the lender.
So Exactly How Much Are We Talking About Through? On a $150k home where the buyer is obtaining 95% financing (Many First-Time Home Buyers obtain an FHA loan with requires at least 3.5% down) the loan amount is $142,500. When you add up the mortgage insurance premiums for the buyer and the bank, the various searches, mortgage recording tax, charges for recording the deed and other related documents, the title bill will add up to about $900-$1,200 depending the on title company, etc.
For most first-time buyers, who have no clue that such an enormous expense is in the pipeline, we're talking about real money. These expenses should be covered in the Good Faith Estimate by the loan officer as well as the real estate agent they are using.
Adding up the Costs of Lending, there are a number of standard loan expenses that are paid out of proceeds: origination fees (how the loan officer gets paid), interest for the month in which the closing occurs, "underwriting expenses" or "document preparation" fees, appraisal or other application costs not paid in advance, the legal fee of the bank attorney, mortgage insurance (if required), pro-rations on taxes and insurance and various other goodies such as flood zone and tax certifications. When you add these numbers up along with the Title Insurance ($1,000), you could be looking at a number from $2,500-$4,000 (Some fees are based upon the purchase price of the home while others like taxes vary by each unique property).
I am not posting this blog to scare away 1st-time home buyers. I just simply want them TO BE AWARE of what they can expect to pay at closing rather than finding all of this out at the closing table. There are a lot of expenses involved but typically they are nickle & dime expenses. While they do add up, buyers just have to remember that it "Costs Money to Borrow Money" - that is a fact of life!
Word of Advice: Crunch the numbers Early and Often as a first time buyer has a lot on his or her plate. In addition, try to negotiate some of these costs to be paid by the seller at closing within the contract. Getting a grip on closing costs is always a challenge but at least make sure that the buyer understands the expected out-of-pocket expenditures in addition to the purchase price. After all, we want happy, excited buyers that can reflect on a good experience for their 1st Home!
So here's a good rule of thumb to remember for both the buyer and the professionals involved: when it comes to explaining closing costs to the first-time buyer: Once Is Not Enough...
Sean S. Williams
Licensed Broker, Realtor®, ABR®, e-Pro®
1st Time Buyer & Relocation Specialist
of Louisville, Kentucky
"Eat. Sleep. Real Estate."
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