My Closing Costs Are What?!

I always get asked by first-time homebuyers, "What are the closing costs?"  Sure, everyone has their own definition of closing costs.  But I know what they are really asking me: "How much am I paying in TOTAL out of my pocket?"  It amazes me how many potential first-time homebuyers are ignorant to how much it really costs to buy a property when getting a mortgage.  And it's through no fault of their own.

A buyer may have a second-cousin who lives across the country who is a real estate professional (substitute this with any other relative, friend, know-it-all, etc.) and tells them that a good rule of thumb is closing costs are 3% of your purchase price.  Sure, if they are buying a $300k house.  What Cuz failed to mention was that on a $100k house, that rule doesn't really work because $3,000 doesn't quite cover all of the closing costs.

Another buyer sees a very convincing commercial or ad from a discount mortgage shop advertising low closing costs of only $1,500.  Now, did the marketing geniuses who created the commercial or ad simply forget to mention the buyer will also have to pay for title, survey, homeowner's insurance, flood insurance, state stamps, just to name a few other closing costs?  It probably just slipped their minds.

And yet another buyer was told by a mortgage professional (the term is used loosely here) that their closing costs would be $X.  Then as the closing date approaches, the figure jumps 25-50%.  But how can that be (sense the sarcasm here)?  New lender laws that protect the consumer require that "certain costs" can't change by more than 10% or the borrower has to be refunded the difference.  But what the mortgage pro failed to reveal to the bright-eyed, bushey-tailed buyer was that he low-balled the estimate for homeowner's insurance, didn't even consider flood insurance, doesn't even know what a mitigation report for insurance purposes is, and completely forgot to mention that buyer will probably end up paying for a home inspection.

My job as a mortgage advisor is to educate buyers and other parties involved in the real estate transaction, not sell them a mortgage (what homebuyer wants to "buy" a mortgage anyway?).  Sure I can quote them an interest rate and say "Hey, are you in or are you out?"  But what good does that do the buyer, the realtors involved, the attorneys or closing agents, the seller, or the owner of the house that the seller was going to buy, if the buyer ultimately doesn't have the funds to close?

Remember, when lenders compete, you win. . .sometimes.