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The Closing Cost Primer

by Lark Turner

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The term “closing costs” encompasses the payments a buyer has to make for the purchase of a new home to become official, from transferring the home title to attorney fees to title insurance. It usually amounts to about 2-5 percent of the final sales price. Below we provide a look at the closing cost process.

The Good Faith Estimate

The Good Faith Estimate or GFE is an approximation of a buyer’s closing costs. A buyer will get a GFE from their lender when they move forward with purchasing a home. The GFE now is more dependable than it used to be; loan disclosure changes put into place in 2010 required estimates to be much more accurate than they have historically been. The GFE is calculated to include fees from the lender plus other third parties, which charge for title insurance and appraisals.

Shopping around to different lenders provides buyers with a good opportunity to compare GFEs.

Buyer vs. Seller

In certain home purchase transactions, a seller will pick up some or all of the closing costs as an incentive to the buyer, an agreement that will have to be outlined in a buyer’s offer. In a tight market with stiff competition for homes, it may be more difficult to find a seller willing to pay for a portion of the closing costs, as deals with fewer contingencies do better.

How to Pay

A buyer may have options when it comes to paying closing costs, from paying them up front to rolling them into the mortgage to trading a higher interest rate for a closing cost credit from the lender.

There is also a “no-cost” option, which trades a much higher interest rate for the buyer’s closing costs to be waived. Of course, this isn’t truly at no cost to the buyer, as the monthly payments will be much higher over the life of the loan. Buyers should carefully weigh how the additional costs of a higher interest rate match up to the closing cost total.

The Final Tally

Before you close on the house, your lender should give you a settlement statement called the HUD-1 with an itemized list of your closing costs. Look at it closely; if you’re going to do any negotiation on the fees with the lender, this is where it’ll likely happen. Some lenders may have fees that, if you ask, can be lowered or removed, especially if they deviate a lot from your GFE.

DC residents are in luck here; the District has pretty low origination and third-party fees, at least when compared to states. Bankrate lists DC among the five cheapest places to close on a home, with average lender origination fees ringing in at $1,791 and third-party fees at $612.

Shopping Around

There are several third-party fees you’ll have to deal with when purchasing a home. For example, buyers will have to find a title company to process the transfer of the home title into their name. The fee charged by the title company will also include title insurance, which protects your purchase in the event that someone crops up to challenge a buyer’s ownership of the home. Ask about what kind of insurance you’re getting and whether it’s the cheapest option, and shop around with at least a couple of title companies.

You’ll also have to pay for things like attorney fees, an appraisal and an inspection. A buyer’s lender usually has an attorney that navigates the closing process, for example, but buyers don’t have to use that attorney. Every step in the process is an opportunity to shop around to ensure you’re getting the best possible deal.

If your question about closing costs was not addressed in this article, don’t hesitate to shoot us an email at .(JavaScript must be enabled to view this email address).

See other articles related to: first-timer primer, first-time buyers, closing costs

This article originally published at http://dc.urbanturf.com/articles/blog/first-timer_primer_understanding_closing_costs/9459

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