SO YOU WANT TO BUY A HOME...huh..(you might want to read this!)

A close friend of mine asked me a question the other day, “Hey Cruzer..how come I had to pay money upfront for my house if I just got a loan for it?”  He was actually talking about the closing costs of his brand new house, which he had to pay out-of-pocket before he can receive the keys to the front door of his new home, which was approximately $4360 in cold hard cash for a $112,000 home.  He didn’t quite understand why he had to pay for something after being approved for a large amount of money where some of it could also had been included (which is a option) in the payment of the closing costs instead of having to borrow from immediate family just to pay for it...I mean...that was the reason why he asked for the loan in the first place!  So I, being a real-estate broker myself, made him buy me a beer as I explained the birds and the bees concept behind the finance expenses involved in a real estate transaction.

First of all what are closing costs?  Closing costs are fees charged to a new home owner that are associated (connected) with your home purchase and loan at the closing or final period of a real-estate transaction, which are incurred by the buyer or seller. These costs vary pending on several factors for example-the type of loan, where you want to live and the property you want to buy, but usually closing costs are approximately 3%-4% of the total purchased price of the new property. The following list are closing items that were included in my friend’s residential contract:

NON-RECURRING FEES:

1. Application Fee >$61- (This fee covers the cost for the lender to process your loan application.  Before submitting the application, ask your lender what this fee covers.  It can often include items like a credit check or appraisal, but not all lenders charge a application fee and it can be negotiated.)

2.  Loan Origination Fee >$1000- (This fee covers the lender’s administrative costs, which is a approximate 1% of the total loan, but some lenders do not charge this fee.)

3.  Appraisal Fee >$450

4. Credit Report Fee >$35

5. Underwriting &  Processing Fees >$1175- (This also goes to your lender, which is the cost of researching whether or not to approve you for the loan.)

6.  Tax Service Fee >$89

7.  Title Fees >$975- (This fee is paid to the title company for doing a thorough search of the property’s records.  The title company researches the deed to your new home to make sure that no-one else has a claim to your property.)

8.  Escrow Fees >$475- (Paid to the escrow company for conducting the closing.)

9.  Recording Fees >$100- (A fee charged by your local recording office , usually city or county, for the recording of public funds records.)

Also included with these fees are the 1st. payment of the following pre-paid items:

Fire Insurance 1yr + 2 months >$392

Flood Insurance 1yr + 2 months (only if needed)

Tax Impounds 7 months >$822

Private Mortgage Insurance (PMI) >$50-(If you are making a down payment less than 20%)

Pre-Paid Interest 10 days>$120

Down Payment Given       $5000

Closing Costs                    $4360

Pre-Paid Items                  $1384

Total Cash Needed           $10,744 to be paid upfront from the buyer’s pocket.

Often many of the fees that make up the closing costs are negotiable, but some are completely unnecessary, especially fees such as high administrative fees, mailing fees and courier fees.  Remember you can shop around and may be able to find lenders, who can offer a loan with lower closing fees.

HOW CAN HOME BUYERS AVOID CLOSING COSTS?

One way of avoiding upfront fees is by getting a no-closing cost mortgage, but typically when a lender offers a deal like this there is a high chance that the lender may charge you a higher interest rate on your loan or wrap the closing fees into the total market owed, in which case you end up paying interest on the closing costs.

Another way of avoiding closing costs is where the home buyer can negotiate with the seller to pay for the buyer’s closing cost.

USING A REAL ESTATE AGENT:

Remember a real estate agent is neither a loan agent or writes out the loans, but can make a good recommendation for one, so it’s always a good idea to use a sales agent especially if there is no charge to have one.  It’s like having a free attorney by your side, who is familiar with the real-estate field, who can give good advice and explain any technicality or real-estate jargon more clearly to you and take care of all the involved paperwork to make sure you are covered all around on this transaction.   All real estate agents (both buyers and sellers) get paid by the seller, which is usually a 6% commission (I only charge 4% myself since I have no overhead) and just because the home has a sale sign with another agent’s name it doesn’t mean you have to go to that particular agent to buy the home, you can choose any agent to represent you.