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Buying or selling a home can be complicated. For some consumers, closing costs are particularly challenging. That’s why Stephanie Gwin Gant, mortgage loan originator of Birmingham’s Silverton Mortgage, and Jessyca McKnight, qualifying broker of Birmingham-based A Prime Location Real Estate, discuss the following with their clients:

1. Where to start. Although many buyers begin their research online, both McKnight and Gant encourage local counsel.

“Online mortgage calculators don’t include taxes, mortgage insurance, HOA dues, property insurance or any required closing costs,” says Gant. “If buyers meet with a local lender, they can learn the best strategies for using their available cash, and which loan programs might best meet their needs.”

“So many people start online, where they could be talking with a lender from anywhere in the world,” says McKnight. “Some of the biggest challenges we have as Realtors are working with out-of-area lenders, or lenders who have ‘virtual offices.’ I’ve had national lenders who quoted very low rates, but it turned out they were estimating the taxes too low.”

Local Realtors can recommend lenders with access to localized programs, McKnight says. “Alabama has the Step-Up program, which is a housing grant provided by the State. A lot of out-of-state lenders aren’t going to know about that. Buyers who would otherwise be eligible are putting themselves out of the running for programs like that when they shop for lenders online.”

2. What to include. Since lenders’ terminology, fees and programs vary, there is no one-size-fits-all closing cost list. However, Gant says the following fees are among those most common among local institutions and programs:

Origination/processing: lenders’ administrative fees, including underwriting. (Underwriting affirms that the borrower’s financial qualifications match the program’s requirements.)

Appraisal: fee for a professional’s evaluation of whether comparable recently-sold area homes support the contracted price.

Title fees/title exam: fee for a professional search of county records, determining whether there are recorded liens or judgements against the property.

Lenders’ and owners’ title insurance: insurance for each party against undetected/unrecorded liens.

Settlement fee: closing attorney or title professional’s fee for coordinating and conducting the closing.

Recording fees: payment to the county to record the deed and mortgage.

Pre-paid/escrow: monies held for homeowners’ insurance, property taxes or other upcoming expenses.

“Buyers definitely need to talk with their lender to get an estimate of what they need to bring to closing,” says Gant. “Some loan programs allow you to roll these costs into the loan. USDA loans, for example, will allow you to use the appraised price of a property, rather than the contracted price. So, if the appraisal is higher than the contract, you can roll in costs not paid by the seller.”

3. What else to include. Gant and McKnight say lenders and Realtors also help their clients consider other common closing-related fees unrelated to law or lending:

Often paid by the seller from the property proceeds, Realtors’ contracted fees are sometimes split between the buyer’s and seller’s agents. However, all parties should confirm contracted agreements before closing.

Realtor-recommended contract inclusions may cover professional home/septic/pool inspections, termite bonds, wood infestation reports and other fees.

Warranties and surveys. Home warranties may be included by sellers or purchased by buyers. Surveys may not be lender-required, but are often recommended.

“I encourage buyers to really listen to the recommendations made by their lender and Realtor about these additional closing costs,” says McKnight. “For example, not taking out a home warranty may save you $700 at closing, but it could cost you thousands later if a septic or electrical issue occurs. A survey is another thing many buyers choose to forego if the seller produces an old survey. But later they may find out that since that survey a fence was put up, encroaching upon the property.”

 

4. Who pays. Although McKnight says it is becoming increasingly common for buyers to request seller-paid closing costs, she cautions against assumptions.

“A lot of buyers go into the process thinking they’re going to need zero dollars at closing. But buyers really need to have an amount set aside for closing costs, even if it turns out they don’t have to use it. The percentage the seller can contribute toward closing costs varies according to the loan type.” Conventional, FHA, VA or bank portfolio loans often differ, she says, in the amount the seller may contribute.

“And, the buyer who has their own closing costs available to them has an advantage,” says this broker. “You put their contract next to someone whose higher offer requests seller-paid closing costs, and the seller immediately wonders if their home will appraise at that higher price point.”

Since such uncertainty often propels sellers to accept an offer with the fewest contingencies, McKnight says Realtors can help each buying/selling client determine their most beneficial closing-related stipulations.

5. What else. Closing costs vary by transaction. Such variances further underscore the importance of buyers’ lending pre-approval (rather than mere pre-qualification) documentation. Even then, important conversations will continue until closing. For example, since most home insurance companies now bundle auto-home policies, McKnight learned from one buyer how difficult it can be to secure home insurance without a driver’s license.

Other closing cost conversations center on best-bet financing. Gant says some buyers elect to “buy the rate down” by purchasing “discount” points. A lender-buyer consult can determine whether paying an extra fee for a lower rate is advantageous to a specific buyer.

Gant, McKnight and their colleagues say Realtors and local lenders are ready and able to explain each client’s closing cost options. “It’s just important to talk with a local lender before you start shopping,” says Gant of buyers.

“And the buyer needs to work closely with the lender and Realtor throughout the process to verify information,” says McKnight. “Local lenders and Realtors know each other’s expectations, and they can work together on behalf of their clients.”