Understanding Closing Costs

Photo by Gabrielle Henderson

One of the main obstacles buyers often seem to overlook are the costs associated with the purchase of a new home. Naturally, a buyer’s main concern — beyond securing financing — is simplified to finding the perfect home. But before that home’s title gets transferred to the new owner, there are closing costs that both seller and buyer need to pay. Some of these are shared and split “down the middle,” like prorated property taxes and HOA dues, but others are specific only to the seller and the buyer. In real estate this is simply known as “cash to close,” and, for buyers, it could be anywhere between three to five percent of the purchase price of the home. However, in order to obtain the most accurate estimate, a real estate agent can share the information of a specific home with the buyer’s lender, who will thereby calculate what the final costs could look like.

The simplest way to understand closing costs is to think about the parties associated with the sale of a home. These costs, then, are broken down between fees from the state, fees from the title company and lender, and fees to the realtor. (As a buyer, your real estate agent is “free” to you. There’s only one small brokerage fee paid to their company.) Each of these parties costs are reflected as a percentage of the purchase price or a set amount per transaction. There could be small variations depending on the title company or lender, and whether you’re a cash buyer, or are using a conventional or FHA loan. The list below shows and explains some of the costs you’re likely to see in your final settlement statement.

Closing Costs

• Origination Fee

  Payment to lender to evaluate your credit, and to underwrite and process loan.

• Discount Points

  Paid to lender at closing to reduce interest rate over life of mortgage.

• PMI or Mortgage Insurance (Conventional Loan)

  Required if down payment is less than 20%. Protects lender if you default.

• Appraisal Fee

  Paid to appraiser to confirm home’s fair market value.

• Title Search

  Covers cost to confirm seller owns property, and that title is free from liens.

• Title Insurance

  Protects lender and (optionally) you if title claim surfaces later.

• Termite Inspection Fee (Free for VA loans)

  Inspection required to certify home is free of termite damage.

• Survey Fee

  Charge to verify property boundaries.

• Buyer Trans-Fee

  Paid to cooperating buyer’s agent brokerage.

• Flood Certification Fee

  Covers costs to determine if home is in federally designated flood zone. If it is, lender will require you to purchase flood insurance. Some lenders also charge separate flood monitoring fee to check for flood map updates.

• Prepaid Interest

  Covers mortgage interest due between date of closing and first mortgage payment.

• Prorated Property Tax

  Covers property taxes from date of closing to end of tax year.

• Homeowner’s Insurance

  Typically you'll pay full first-year costs upfront at closing.

• Homeowner’s Association Transfer Fee

  Paid on properties governed by associations to transfer ownership documents to you.

• Initial Escrow

  Lender may require first two months of next year’s homeowner’s insurance, flood insurance and property taxes to build up reserve.

• Closing or Settlement Fee

  Paid to title company, attorney or escrow company that conducts closing.

• Recording Fee

  Paid to state to record transfer of property from one owner to another.

• Transfer Tax

  Paid to state, based on the amount of the mortgage.

If you have any questions pertaining to this topic or any other regarding real estate, please reach out to me. I’ll be happy to further discuss your goals and what are the best steps forward.

Guide for First-Time Home Buyers

Photo by Avi Waxman

I’ve decided to buy — now what? Reasons to buy a house are different for everybody but the process to close is relatively the same for all. Certain steps may not be present in some deals — a cash buyer can sidestep things a buyer with a loan cannot — and the completion of the purchase could fluctuate between thirty to forty days. But in the best interest of the buyer, the road to ownership presents many opportunities to get the best deal. The chart below is a visual representation of the buying process, and breaks down the steps the buyer can expect during the window before closing.

The buyers’ best guide is their real estate agent, so it’s important to be transparent every step of the way and have a clear set of goals.

If you have any questions pertaining to this topic or any other regarding real estate, please reach out to me. I’ll be happy to further discuss your goals and what are the best steps forward.

Buyer Step # 1: Financing

Photo by Micheile Henderson

The most seemingly logical step to take once you’ve decided to purchase a home might be to start looking at and touring properties. However, the first step in the home-buying process is to secure financing. Financing entails speaking with a mortgage originator or bank about your goals, and how you can achieve those realistically. The financing process is one of the most matter-of-fact undertakings in real estate, as it’s not influenced by opinion or any subjective factors that can benefit or detriment your ability to qualify for a mortgage. It’s wholly dependent on your current financial standing: how’s your credit, income, debt, assets, and liabilities? A combined analysis of these and other metrics by a professional mortgage lender will render the loan amount you qualify for — the maximum amount of money the bank can lend you for the home of your dreams. Having this information facilitates the search process, and helps the buyer set realistic expectations about the home they can afford.

There are many reasons to secure financing and obtain a letter of pre-qualification before touring any homes. As aforementioned, it helps set a realistic expectation:

A first-time homebuyer might start looking at and touring properties listed for $280 thousand dollars. Once they start and complete the financing process they find out they qualify for a maximum of $240 thousand dollars. Having seen the more expensive homes they’ve done a disservice to themselves: the homes they qualify for aren’t as big or in the area they prefer. Their expectations have been tarred.

A letter of pre-qualification also serves as a compass to your real estate agent. When making a search for potential homes, the most important metric for an agent and their buyer is the price range. A buyer might have a maximum price they don’t want to exceed, but without knowing the loan amount a lender is willing to supply, they are both swimming blindly in a broad sea of possibilities. The real estate agent could search for homes between $250k and $290k, but neither the agent nor the buyer know whether this is an appropriate range. Other factors like a monthly homeowner’s association (HOA) or community development district (CDD) payment, can influence a buyer’s ability to qualify for a specific home, as these become part of their monthly expense. A lender is able to break these down and clarify a realistic budget as the buyers begin their search.

There are many steps to purchase a home and they’re meant to be done through an organized process, not at random or erratically. If you’re serious about becoming a home owner, you first need to find out if you qualify for a mortgage, and what that mortgage will look like if you do. Seeing homes without securing any type of financing first is not in anybody’s best interest, and most of the time turns out to be a misuse of time and effort. This is true specially in the current market, where many properties are listed for no more than a week before they go “pending” – when a seller and buyer have agreed on an offer and started the process of closing. Since every offer needs to be presented with a letter of pre-qualification, not having it will prevent a deal from taking place.

In real estate, the best agents know to be proactive; Confide in us and trust that we have your best interest at heart.

If you have any questions pertaining to this topic or any other regarding real estate, please reach out to me. I’ll be happy to further discuss your goals and what are the best steps forward.