Buying a home involves various costs at different steps in the buying process. During the option period, for instance, you will need to submit earnest money into an escrow account, which essentially serves as a good faith deposit that is applied to your down payment at closing. A little later on in the escrow period, you will probably need to pay for an inspection to ensure there are no major issues with the home.
Closing costs are one of the last expenses in the homebuying process and include all of the fees due at the time of your closing meeting. There are different sources of these fees. For instance, some fees are from the lender, while others are federal and state taxes.
For a buyer, closing costs typically range between two to five percent of the home’s value. Sellers have their own set of closing closets, which include a five to six percent agent commission, split between the buying and selling agent at the time of the closing. Although, you may be able to reduce the cost of agents’ fees when working with certain brokerages like REX.
While these extra expenses are common, the amounts can take first-time homebuyers by surprise. Fortunately, there are ways to negotiate and lower some of your closing costs.
Which Closing Costs Can be Negotiated?
Many homebuyers don’t realize that some closing costs are negotiable, meaning that certain fees can be reduced or waived altogether. Here are some ways to negotiate lower closing costs.
1. Agent fees
In a traditional real estate transaction, one of the most significant closing costs is the 5-6% commission split between the buying and selling agent. While technically paid for out of the proceeds the seller receives from the home sale, since it’s the buyer who brings all of the money to the transaction, the fees get passed on to the buyer in the form of a higher mortgage and down payment.
Therefore, one of the most significant ways to save on closing costs is to negotiate your agent’s fees upfront or work with a brokerage like REX, which offers commissions savings on both the buy and sell side.
2. Homeowner’s insurance and title insurance
All lenders will require homeowner’s insurance and title insurance. However, you don’t have to get it through your lender or their third-party service. You can get quotes from different insurance companies for the same amount of coverage and select the company that provides the lowest rates.
Regarding title insurance, you can reach out to title company competitors to explore what they charge. Since prices can vary among companies, you can save money by shopping around.
While shopping around can save you money, the lender may have the option to turn down your request to use a different company for these services.
3. Loan origination fees
Your loan origination fee is paid to the mortgage broker as a commission for bringing the bank business. However, you can talk to the lender to see if any parts of the fee, such as the application or processing fees, can be waived or reduced.
Which Closing Costs Can’t be Negotiated?
Typically, non-negotiable closing costs include taxes and other fees charged by the government or those from third-party providers, such as an appraiser or notary. That said, you may be able to shop around and select a third-party provider with the best rates.
Fees charged by a condo or homeowner’s association are also non-negotiable.
Strategies to Help Buyers Lower Their Closing Costs
Now that we’ve determined which closing costs are negotiable, and which aren’t, here are some strategies for cutting down on common home buying fees.
1. Get quotes from different mortgage lenders
Shopping around for a loan is the best way to ensure you stay on budget with your offers and get the best rate on a mortgage, which could save you thousands over the life of your loan.
Jack Brousseau, Mortgage Sales Director at REX Home Loans, suggests getting quotes from at least two or three different lenders to ensure you get the best deal. “Just be sure you are comparing apples to apples,” he says. “There may be lenders out there who might give you an inflated property value to make the loan seem better. Be sure to look at the property value on the loan estimate. Also take a look at whether the rate is locked or not.”
When talking with loan officers, ask them about their typical closing costs. “Legally,” suggests Brousseau, “once a borrower submits an application, a lender has three days to provide them with a loan estimate.” A loan estimate provides a detailed breakdown of the fees, rates, and closing costs associated with your mortgage.
Once your mortgage application is submitted, you have a 30 day window to qualify for additional loans without an extra hit to your credit. Apply with a few different lenders and use what’s quoted in your loan estimates to negotiate better terms.
“Lenders will be more motivated to compete for your business if you show them another loan estimate,” says Brousseau.
2. Review your loan estimate and understand what each fee covers
When you receive your loan estimate, review it carefully. You’ll want to go through each item with your lender and make sure you understand what each fee covers. This step can help you identify unnecessary, duplicate, or padded fees.
If you notice duplicate or unnecessary fees, ask your lender to remove them. To help, compare the information on your closing disclosure form, a document provided by your lender at least three days in advance of your loan closing date detailing the final terms and costs of your mortgage, to what was quoted in your loan estimate. Discuss any discrepancies with your lender.
3. Try to schedule your closing at the end of the month
Most mortgage payments are due on the first of the month. Closing near the end of a month can reduce the number of days during which the per diem interest is applied before your first mortgage payment is due.
4. Negotiate concessions from the seller
Buyers pay the majority of the closing costs. However, you may be able to negotiate with the seller for certain concessions or credits. Seller concessions are when a seller agrees to pay for certain closing costs such as property taxes, appraisal fees, and attorney fees.
While seller concessions won’t affect a home’s final sale price, they can reduce what the buyer pays at closing. A seller may agree to concessions if they’re trying to sell their home quickly or are facing a buyer’s market.
However, if you ask for seller concessions, this may make your bid less competitive. Also, sellers may not be motivated to provide concessions in a seller’s market, so talk to your agent before asking for concessions.
Steps Buyers Can Take Before Applying for a Mortgage to Lower Closing Costs
Buyers’ qualifications can significantly influence both your mortgage rate and closing costs. If you’re just starting the homebuying process, here are some steps you can take now that may help you get more favorable loan terms in the future.
1. Understand your credit score
Before applying for a mortgage loan, you’ll want to check your credit score. Lenders use credit scores to indicate how likely you are to repay your loan on time.
The higher your FICO score, the better your chances for getting a loan with favorable terms. Ideally, you’ll want to have a FICO score of 780 or better and be able to put down 20 percent to receive the best rates.
The minimum credit score you need will vary based on the type of loan. For instance, many conventional loans require a score of at least 620. That said, you’ll need a higher score to have more favorable loan terms. Fortunately, you can improve your credit score by keeping up with your bills and paying down any debts.
2. Avoid taking on any new loans or additional debt before starting the home buying process
If you’re planning to buy a home, you’ll want to assess your debt-to-income ratio (DTI). This measure provides lenders with an idea of how risky it may be to offer you a mortgage loan. This ratio assesses all your monthly debt payments divided by your monthly gross income.
Many lenders prefer a DTI that’s less than 36%. However, if you take on a new loan prior to buying a home, this could raise your DTI, which may influence your ability to obtain a quality loan with favorable rates and closing costs.
3. Avoid making life changes that may impact your credit score when shopping for a home
When you start the homebuying process, you’ll want to avoid making any significant life changes such as changing jobs or opening new credit card accounts. Changes that impact your financial state may cause lenders to offer less favorable terms.
4. Have money available for a down payment
A large down payment can make it easier to have a favorable loan rate, which also can impact your closing costs. For instance, if you can put 20 percent down, you can avoid paying for private mortgage insurance on conventional loans.
Bottom Line on Lowering Your Closing Costs
When it comes to lowering your closing costs, you’ll want to take the time up front to look around for the best rates and deals from mortgage lenders and other third-party vendors. Additionally, you’ll want to make sure you’re in a solid financial position to qualify for loans with competitive rates.
Additionally, working with a team of experts who have your best interests in mind can help ensure you get the best rates and credits during the homebuying and closing processes.
Like our real estate agents, REX home loan advisers don’t work on commission. Instead, they’re incentivized to put the borrower’s needs as their priority, so the borrower receives the best loan possible. Since we don’t pay high commissions or bonuses, we can pass these savings onto our customers as lower rates or larger borrower credits. So, if you’re currently shopping for loans, contact our REX home loan experts today to see how we can help you.