How to Negotiate Closing Costs when Buying a Home
When you're buying a home, the costs involved are more than just the list price of the property. Moving expenses, furnishing and redecorating the property, and the closing costs you are responsible for all add up to increase the overall cost of the purchase. Some of these are out of your control, others can be delayed until you've saved up for them, and others are negotiable. Closing costs can sometimes fall into the last category.
In recent years, very few buyers were able to negotiate closing costs. A real estate market that leaned so heavily in favor of sellers left buyers at the mercy of the market, as a seller could simply go with a different offer than wasn't asking for any concessions to be made or expenses to me shared. Now, as the market shifts to become more balanced, buyers are able to negotiate again.
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What are closing costs?
Closing costs include all the fees and expenses associated with buying a home, mostly associated with the lender but also including real estate agent commissions, home inspection fees, and home appraisal fees.
These individual fees and expenses generally add up to between 3% and 6% of the home, though it can vary significantly depending on the details of the situation.
In some cases, a buyer is able to negotiate with the seller, asking for credits toward certain closing costs in exchange for a desirable purchase price. You may also be able to negotiate with your lender to cover some of the costs or lower the price of them, as the lender wants this loan to close almost as much as you do.
What closing costs are negotiable?
You will not be able to negotiate 100% of your closing costs. Some are non-negotiable and going to be your responsibility. Before approaching your lender or the seller, familiarize yourself with the negotiable and non-negotiable costs.
- Homeowner's insurance is required, but by shopping around and comparing rates you may be able to find a much lower price for good coverage that will still meet your lender's standards.
- Discount points are an upfront fee borrowers pay to get a lower interest rate on the loan. Each discount point generally cost about 1% of the total loan amount ($3,000 for a $300,000 loan). You can negotiate to ask the seller to pay for some or all of the discount points, which may work in the seller's favor if it helps you afford a higher purchase price.
- An origination fee is the cost of underwriting the loan, generally around 1% of the total loan amount. This fee is negotiable, and you may be able to get your lender to lower or even remove the fee altogether. An alternative to the origination fee used by some lenders is the underwriting fee, which works much in the same way.
- Loan application fees can be negotiated as well, often able to be totally waived.
- Title insurance is a policy that protects your lender should anyone bring up a title dispute after you purchase the property. If the premium seems high to you, ask your lender if they are willing to use a different title insurance company.
- Appraisal fees are generally a set price, and are paid at closing.
- Credit check fees are not negotiable, as a credit check is required before lending. In some cases the lender will pay the fee for you, but usually you will be responsible for this.
- Property taxes are non-negotiable and must be paid by the homeowner.
How can I negotiate closing costs?
There are basically two parties you should negotiate with to help cover closing costs: your lender and the seller.
With your lender, first look over the loan estimate document, which will show you an itemized list of each fee and how much it is. Determine which you may be able to negotiate and ask the lender if they can lower them. If you have been pre-approved by multiple lenders, ask them all and let them know you are shopping around and looking for the lowest overall closing costs.
With the seller, consider asking them to cover the title transfer fee or assist in purchasing discount points, which will allow you to offer them a higher purchase price than you would otherwise be able to afford with a higher interest rate. This is a great option in the current market, where rising interest rates are making some buyers hesitant to shop while sellers remain hesitant to lower prices.
When you are ready to begin looking for your home in Metro Detroit, let us know. We would love to help. Contact us any time to get started!