The following is a reprint of my column that appeared in Frontiers In L.A. magazine on September 28th, 2010
I’m about to make my first real estate purchase in the next couple of months in the South Bay. Aside from the actual purchase price of the home, what costs and expenses should I be prepared for in closing costs? —Rebecca, Manhattan Beach
Good question, Rebecca. Often buyers go into a purchase a bit blind to what they can expect as far as associated costs with purchasing a home. First, I’ll tell you what you don’t pay, which is your agent’s commission. That is a cost that comes from the Seller. Now on to what you can expect to pay on your side.
As a rule of thumb, you can usually count on closing costs of around two to three percent of the purchase price of the property, give or take. The majority of your costs come from one of two sources—the lender or the escrow company—and you’ll see all of the costs broken down on a form that the lender provides at the end of the transaction called a HUD-1 (or Settlement Statement). When you first enter escrow, the lender should provide you with a Good Faith Estimate (GFE) of your closing costs.
Sometimes you can request a credit from the seller to be applied to your closing costs, reducing the amount you have to bring to the table. This is especially helpful to first time buyers working with limited funds. Some of the major expenses you will be expected to cover include:
• Lender Fees. These are fees the lender charges for their services, including processing the loan, underwriting, generating loan docs, appraisal, tax service, etc. Expect fees of anywhere from $1,500 to $2,500. Most often, this is where you might be able to do some negotiating to get some fees reduced or dropped altogether. It never hurts to try.
• Loan Origination Fee (or “Points”). This is what the lender makes on the loan. It can also refer to a fee you can pay upfront to buy your rate down to a lower percentage (one point equals one percent of the loan amount).
• Lender’s Title Insurance. This is insurance usually paid for by the buyer that protects the lender against any future claims and losses that might arise if the title to the property is found to be defective (in other words, someone other than the person who sold it to you is suddenly laying claim to it). This cost can range from a few hundred to a couple thousand dollars, depending on the value of the property. Be sure to inquire about a “short-term rate” if the property’s last sale was within the last five years.
• Property Taxes. Assuming the seller is current on their property taxes, you as the buyer will reimburse them a pro-rated amount of property taxes for the period from which you close escrow to the end of the tax period. This amount will depend on what time of the year you close escrow.
• Interest on your new loan. Running from the day you take ownership to 30 days prior to the first mortgage payment due date (for example, if you closed escrow on October 7, you’ll pay interest on your loan from that day through the end of the month).
• Homeowner’s Insurance. For a single-family home, homeowners insurance is required, which usually covers fire, tornado, hurricane, etc. For a condo, lenders require the borrower to purchase an insurance policy called HO-6. While the condo association should be carrying a master policy that insures the structure, you will be required to carry this policy which covers “walls in,” or anything within the unit that is a fixture, such as wiring, plumbing, carpets, cabinetry, etc.
• Escrow Fees. These are fees charged by the escrow service for their efforts. The seller will have their own fees, and the buyer theirs. Typically, escrow fees are equal to a $200-250 base, and $2 per $1,000 of the purchase price.
There will be a lot of other little charges that you’ll want to watch out for and monitor on your Good Faith Estimate. Things like messenger services, reimbursements for wire services, notary services, etc. These items are often estimates that you’ll do well to verify and question. There is often an additional pad of around $500 added into the GFE as well to cover any unexpected costs or shortfalls, that you will usually end up getting back at the close of escrow. Be sure to request a revised GFE as you approach your closing date, and don’t just accept any charges that pop up on the GFE. A good agent will help you go through each item and can explain which ones might be questionable.
With new construction, there can be other significant charges that can add up pretty quickly, so be sure you’re in the know on those before entering into a deal, or get in touch with me and I can go into more detail with you. There are always some ways around them and tricks for bringing some of them down as well.
Happy home hunting!
Jefferson Hendrick is an L.A.-based Realtor with Keller Williams. Contact him with questions, concerns and real estate inquiries at firstname.lastname@example.org or facebook.com/jeffersonhendrickrealtor.