Closing costs are perhaps one of the easiest negotiation points in the home buying process. If you know how to approach them, you’ll be able to minimize how much you end up shelling out of pocket and potentially loop in the seller for the tab. You can also refinance and spread the costs out later – but why pay interest on them?
Know what’s actually on the table
Before you can start haggling over anything, though, you need to know which fees you’re stuck with and which ones might be flexible. Government fees – recording fees, transfer taxes, and municipal charges – are set in stone. You won’t be able to negotiate those away.
What you can potentially adjust are the lender-specific fees. Application, processing, underwriting, and origination charges are all at their mercy because they set those fees, not the government. If they quote you a $1,200 origination fee, it’s because they said so, not because the Mayor passed an ordinance declaring what origination fees shall henceforth be. And, like anything else that’s negotiable, if they said $1,200, they can say $1,000 just as easily.
Play lenders against each other
The most effective way to find lower lender fees is to apply with multiple lenders and get several Loan Estimates to use as bargaining chips. The Loan Estimate is the official three-page document that you receive after applying for a mortgage. It itemizes estimated closing costs in an easy-to-read fashion that encourages apples-to-apples comparisons.
With two or three Loan Estimates in front of you, you can go back to your favorite lender and ask them to match the lower fees. Many will. They want your business, and origination fees are one of the bigger profit centers for that industry. They’ll dice it as thin as you want. They may even offer you lender credits, where they pay a portion of your upfront closing costs in exchange for charging a higher interest rate over the life of the loan. That won’t be a good deal for everyone, but it is a real option if you’re cash poor at closing time.
Shop the third-party services yourself
A significant portion of the closing costs will be paid to outside providers – title insurance, home inspectors, and surveying firms. Your lender may provide you with a preferred list of providers, but in almost every case you are free to shop around.
Two separate title insurance companies will quote you two very different prices for the same coverage, and taking an hour to call 2 or 3 independent title companies can save you hundreds of dollars on this one line item. Same goes for inspection and surveying. The flat fees seem insignificant in isolation, but they can add up to real money quickly. Buyers who just take the lender’s recommendations here are typically leaving cash on the table.
How to structure an offer that gets seller concessions
When the conditions favor buyers, such as in a buyer’s market, or when a home has been sitting for 60 days or more, asking the seller to pay all or part of your closing costs is reasonable, often expected. Known as seller concessions, these are typically added into the purchase contract as a specific dollar amount or percentage of the sale, which goes towards your closing costs.
The request for seller credits does not need to change the final amount that a seller receives. It’s all in the framing of the offer. You can slightly increase the purchase price and the seller credit will offset that increase. So, the seller still nets the same at closing, and you reduce the funds needed at closing.
Knowing whether the local market supports that kind of request is important. A solid comparative market analysis (recent comparable sales and active inventory) will show you how much negotiating room there is in the market. It’s why we always encourage buyers to work with a good local brokerage such as myersandmyersrealestate.com/. They will provide that analysis before you write the offer, which is really solid when it comes time to decide how aggressively to negotiate.
Understand concession limits by loan type
If you are using a government-backed loan, there are specific limits on the amount of money a seller can contribute. FHA loans limit the seller’s concession at 6% of the purchase price. VA loans limit them at 4%. Conventional loans have different limits depending on your down payment, ranging between 3% and 9%.
Buyers who are unaware of these limits sometimes submit contracts that exceed them, which becomes a problem at closing when the lender sees that the concession is not in compliance. Keep your ask in the limits of your financing program from day one, and ensure your sales associate knows which program you are using before any contract is negotiated.
What to check on your Closing Disclosure
Three days before closing, you’ll receive the Closing Disclosure – the final five-page document showing the actual costs you’ll pay. Compare it to your original Loan Estimate line by line. Fees shouldn’t increase significantly without a valid reason, and some increases are prohibited by lending regulations. If something has changed and nobody told you why, ask before you show up to sign.
Closing costs typically run between 2% and 5% of the purchase price, which means on a $400,000 home, you could be looking at anywhere from $8,000 to $20,000 due at closing. That’s not a number you just accept. It’s a number you work on – one line item at a time.
