Hip, hip, hooray! Your home has officially sold and you’re about to receive a fat check for the exact price you put it on the market for…right? Unfortunately, sellers don’t typically pocket the exact dollar amount a buyer agrees to pay and buyers aren’t just shelling out the price they agreed to pay for the home.
Closing costs affect both the buyers and sellers in a real estate transaction. Averaging between 3%-6% of the final cost of the home, end of transaction fees can really add up.
Sellers should remember to bake these costs into the asking price and buyers should remember to reserve some cash for unexpected expenses. Check out the helpful tips below to assist you in lowering the often, high price that can come with closing on a home.
Buyer’s Closing Costs
First thing’s first: If you’re purchasing a home for the first time and aren’t sure where to start, check out our Ultimate First Time Home Buyers Guide Vol. 1. This 18 page resource gives you a complete run down of how to organize your finances in preparation for your first home purchase. There are six more volumes in the works so stay tuned. We’ve got your back.
Making the biggest purchase of your life is no small feat. It comes after hours of home searching, discussions with mortgage lenders & real estate agents, and of course, check writing. According to Zillow, buyers pay on average, $3,700 in closing costs on top of the cost of the home. Below is a detailed list of closing costs to factor into the expense of buying a home.
Escrow Fee– This fee is paid to the escrow company for holding the deposited money from the mortgage company and the borrower.
Credit Score Report– Yup, you even have to pay for mortgage companies to look at your credit score. This averages around $40.
Underwriting Fee– This fee will be given to your lender for researching how much you’re approved for. This fee is usually somewhere around $800.00
Processing Fee– The processing fee can be up to $1,000 and is paid to your lender for processing the information on your loan application.
Attorney Fee– These fees can range from $1,000 to $1,500. Attorney fees and the nature of your transaction should be discussed prior to hiring the attorney.
Title Search Fee– This fee is paid to the title company for conducting a history search of the property’s records. This is done in order to make sure that no one else has a claim to the house.
Overwhelmed? Don’t be. There are ways to manage these fees. If you’re running low on cash after purchasing the home of your dreams, you could factor these costs into the loan amount you requested. This may cost you more in the long run but will save you on upfront expenses.
You can also try to negotiate with the seller and request that they pay some of the closing costs. It’s a tax deductible expense for the seller, but don’t expect this to be in option in a seller’s market.
Know The Market
With the housing market changing as frequently as Facebook’s newsfeed algorithm, it’s important to keep a finger on the pulse of trends. Knowing the difference between a buyer’s and seller’s market is a great place to start.
In a typical seller’s market, inventory is limited, houses are in higher demand and will likely sell for more than they’re worth. In this particular case, sellers have the upper hand and more of a say in the asking price.
In a buyer’s market, homes are selling like hotcakes and inventory is filled with options. This situation allows for buyers to have more of a say in negotiating closing costs and more wiggle room in asking price.
“If it’s a strong sellers market it’s less likely that the seller will offer or agree to any concessions and vice versa,” said RE/MAX Real Estate Limited Agent, Stephen Braconi. Stephen closely guides his clients throughout the closing process and encourages them to work alongside with lenders and utilize RESPA compliant programs that would permit credits to buyers at the closing table. This will in turn, lower their out of pocket closing costs.
Seller’s Closing Costs
In addition to paying the agent, sellers can expect to help pay for some of the buyer’s closing costs. This includes things like the survey fee, pest inspection and an appraisal fee.
Closing is also the time for sellers to pay off the loan on their home. Your loan payoff may be a little higher than the balance on your loan due to prorated interest and you might owe a prepayment penalty for paying it off before the end of the term. If you have a home equity loan or line of credit, it will have to be paid in full at settlement as well.
To make sure that your home is being priced at fair market value, it must be appraised by an appraisal company. This can cost up to $400. Sellers can expect to pay for the deed of the home, homeowner association fees (if there are any) and prorated taxes. Sellers will pay for half of the Title Company and search fees. They are also responsible for utilities such as oil in the heat tank, water, sewer, electric and gas.
Sellers should be prepared (prior to settlement) to pay for any repairs that crop up as a result of the home inspection. Sellers do, however, reserve the right to put a dollar cap on the amount they are willing to pay for repairs. This can be specified in the sales contract by their Realtor.
If the repairs exceed the specified cap and a mutually agreeable remedy cannot be reached, then both parties may opt to cancel the sales contract.
RE/MAX Real Estate Limited Agent, Ryan Gibbons suggests you take preventative measures before putting your house on the market. “You should be aware of the condition of your home and consider doing a home inspection prior to listing. I have found that it is cheaper to have repairs done prior to selling and may actually get you more money. This way, when the buyer does the inspection, you will not be blindsided by additional costs which will make for a smoother transaction.”
Paying Your Agent
On average, a real estate agents’ commission is 6% of the home’s selling price. Of that percentage, 3% will go to the brokerage associated with both parties and then a percentage is paid to each agent—it’s a fair, 50-50 split. For example, if a house sold for $400,000, 6% of that would be $24,000 in commission with $12,000 going to each agent.
Realty Transfer Fee
The state of New Jersey has a Realty Transfer Fee (RTF). This fee is based on the sale price of the home and is typically collected at closing by the title company to then be allocated throughout the counties in the state. The elderly, physically disabled and low to moderate-income households receive a discount on this fee.
As we mentioned above, closing costs can average anywhere from 3%-6% of the transaction total. What does that really mean, you ask? If you purchase a home for $289,000, your closing costs will most likely range from $8,000- $17,000. Crazy, huh? We suggest you find yourself an experienced agent who knows the ins and outs of the market and the closing process. This will save you time, aggravation and most importantly, precious Benjamins.
Believe it or not, the time of the month you close can impact the amount you pay. An easy way to minimize your out of pocket costs is to schedule your closing at the end of the month. For example, if you closed on, September 5, you will have to pay the interest from September 4th-30th whereas if you closed on the 28th, you would only be paying two days worth of interest.
Advice From The Professionals
RE/MAX Community Agent, Debbie Bathen, recommends that sellers dedicate time to preparing the house to present to potential buyers. “Make sure the home is clean, uncluttered and staged both in and outside. Also, it’s a good idea to get the home appraised by the mortgage lender prior to listing the home. By doing so, sellers will know exactly what the home is going to sell for, no second-guessing,” said Bathen.
Agent, Joy Koch of RE/MAX Properties recommends, “When sellers are getting ready to put their home on the market, they should locate their original or updated land survey, a copy of their Deed and a copy of their title insurance policy so they can give this to their attorney when offer comes in to purchase”.
“If the seller is obtaining a certificate of occupancy or resale they should submit an application with ample time to spare because some towns may limit the days they inspect a home and can be backed up,” stated RE/MAX Quality Homes Broker/Owner, Jorge Ledesma.
Do you have further questions? Perhaps you have some insight to share from your own closing experience. Leave us a comment, we’d love to hear from you!