email challenge: What are buyer's closing costs and what are they for? Commissions?

Recently I got an email from a potential first time buyer who was hesitant to start househunting because of warnings she had received from friends about how expensive it is to buy.  Here is part of her email:

I want to buy my first home.  Friends keep telling me that I have to pay closing costs and that they are a lot of money.  Is that true? What are the closing costs for? And how much commission do I have to pay if I use a real estate agent?

The very first thing I want to make clear is that the seller pays ALL commissions from the proceeds of the sale.  Absent a separate agreement you make, which is uncommon, you as the buyer will not pay any commission to the Realtors/real estate agents.

When the seller retains the services of a Realtor to help them to sell their home, they sign a commission agreement which states the total amount of commission the seller will pay.  If that Realtor finds a buyer himself, he will collect the entire commission.  If the buyer is represented by her own Realtor, the seller's Realtor will have to give the buyer's agent a share of that commission when the escrow closes.

Some buyers feel that they can get a better deal if they don't use the services of their own Realtor to assist them in finding a home, negotiating the deal and preparing the piles of paperwork involved.  This is absolutely false, and in fact in some cases the truth may be just the opposite.

Buying your first home can be a terrifying experience, as you are probably unfamiliar with all of the terms you may hear, documents that have legal significance, and when you can and cannot negotiate certain issues.

Some people who have bought other homes may feel that they have gone through it before so they can do it on their own, but this can be dangerous because laws change constantly, as do the forms and required disclosures.  The services of an experienced Realtor are FREE to you as the buyer, so do the smart thing and find a Realtor to help you.

As for closing costs in general, there are two main categories for a buyer.  Those directly related to the purchase escrow will occur in every transaction.  Those related to your loan will depend on the type of loan you get, your creditworthiness, and the the amount of down payment you can invest.  If you will be paying all cash, these costs are not involved.

Before you start househunting, I suggest you meet with a lender and determine the amount for which you will qualify and get a very rough estimate of what the loan costs will be and whether they will be rolled into the loan or payable in cash before escrow closes.

Those costs could run from one to four percent or so, depending on the factors above and others, including whether you will be required to pay for things like mortgage insurance.  Other issues may affect those costs as well, but in general loan costs include:  loan origination fees, any charge for negotiating a lower interest rate, credit reports, appraisal, and prorated homeowner's insurance and property taxes, plus various administration expenses like delivery and other smaller costs.

Escrow's responsibility is to gather all documents, including loan documents and documents prepared by the Realtors and signed by the buyer and seller that clarify the terms of the contract for the purchase, required disclosures, etc.  It is their job to find out the amount the seller owes on the property and to see that your loan proceeds are deposited into escrow and they distribute all of the funds to the seller after paying anyone else who is owed a portion of the proceeds, such as the previous lender, any liens, commissions, and the seller's closing costs.

Escrow will thereby assure that you receive a clean title to the property, with no outstanding liens except that which you incur with your lender.

The title company will do a title search during escrow and guarantee that there are no secret liens that no one knows about.  They will issue you a policy of title insurance to protect you and your lender against any liens that might not be covered by their title report.  There are seldom any, but if you later discovered an encumbrance that did not appear in the report, you would be able to turn to the title company to indemnify you against it and negotiate on your behalf.

Your escrow and title costs will include the fees to those two companies for their services, which are based on the purchase price, any prorated taxes and insurance not included in the loan costs, document preparation, delivery and recording costs, notary fees, any inspection fees not paid for at the time of service.  These could total about one and one half to two percent of the purchase price. Your Realtor can help you get a rough estimate of these costs depending on the offer you want to make.

I have not tried to give you a detailed itemization of every single cost that might arise, but this should give you a general idea of what these closing costs are buying you.

An important thing I want to stress is that your closing costs may be one issue that could be negotiated with the seller.  In your offer, you might ask seller to pay certain charges or to pay a certain dollar figure toward your costs or a percentage of the purchase price toward them.

Just remember that the seller has his own closing costs and is paying all commissions, so they will be looking for the cleanest offer.  If your offer asks him to pay all of your costs and someone else offers the same purchase price but will pay more of their own costs, he will likely choose to accept the other offer.  So your offer should be drafted carefully and thoughtfully. 

If the property has been on the market for awhile with no offers, it may be easier to ask for more of your costs or simply to offer a lower purchase price and pay your share of closing costs.  Each situation is different.  Your Realtor will help you make your decisions.

Also, if you are currently paying rent, it may be costing you money that you will not be losing if you own your own home.  Your loan payments will begin to increase your equity, and you will receive tax benefits as a property owner, among other financial benefits.

So your first step should be to meet with a lender of your choice to see how much house you can afford and how much cash you will have to have available.  If you have a Realtor in mind that you would like to use, that person may be able to recommend several lenders from which you can choose if you wish.

This is an adventure you will enjoy and you will be very happy that you embarked on it if you find a Realtor who can walk you through it and remove the fears.

******
Susan Neal
Realtor/ Broker
Century 21 Noel David Realty

Full time real estate services in Fair Oaks CA, with friendly professionalism, 30+ years experience.
I work hard to give my buyer or seller a low-stress transaction.

"Happy clients make me happy."

For all your real estate needs or questions, call me at (916)705-8951or visit my website at www.SusanNealFineProperties.com.