How to Prepare for Real Estate Closing Costs
By Brandon Cornett
Closing costs are the fees and adjustments owed at closing (or "settlement") by both the buyer and the seller. Closing costs may differ from state to state, but the following information will help you understand the types of costs you might incur.
Prior to closing day, your lender should give you a list of itemized closing costs associated with your loan. The list should be exhaustive, but sometimes it is not. Some of the most common items missing include: attorney fees (if any), tax adjustments, oil adjustments, title insurance gratuity, and other closing adjustments.
If you find any of these items missing from the closing cost estimate provided by your lender, ask your lender about them. Request a detailed list of ALL possible adjustments and fees you might incur.
Closing costs are paid by the buyer, or the seller, depending on the cost. For example, the seller will pay a sales tax or conveyance tax in most states. In some cases, the seller even pays the closing costs of the buyers. When the seller pays these closing costs, it is referred to as a seller’s concession.
The Seller's Concession
A seller’s concession helps the buyers finance their closing costs. Basically, the closing costs are estimated in advance, and that amount is added to the sales price of the house. The seller then pays the closing costs of the buyer with these extra funds.
Let's say the purchase price of a home is $150,000, the mortgage amount is $135,000, and the estimated closing costs are $6,000. In that case, the seller's concession would adjust the figures in the contract to a sales price of $156,000 and a mortgage of $141,000. The extra $6,000 the seller earns would actually be used to pay the buyer's closing costs. Of course, this would need to be spelled out in the contract.
Financing Closing Costs
Some lenders let buyers finance closing costs without using the seller’s concession. If you want to minimize your out-of-pocket expenses, speak to your lender about your options for financing your closing costs. Just keep in mind that you will be paying interest on this higher loan amount.
The key is to be informed and prepared. That means maintaining a list of anticipated closing costs and comparing it against the estimated costs prepared by your lender. Feel free to ask questions, and make sure you have the most accurate information possible so you can be prepared for the closing.
Most lenders give accurate estimates for closing costs. But there are some lenders who do a less accurate job, and there's always the possibility for human error. Rather than accept the closing cost estimate at face value, dig deeper until you are confident the estimate you received encompasses all closing costs.
The most significant expense commonly left off the list are tax adjustments. Tax adjustments can be hundreds or thousands of dollars. Make sure tax adjustments are factored into your closing costs estimate. Otherwise, you may be unprepared for the amount of funds do on closing day.
* Copyright 2006, Brandon Cornett. You may republish this article if you keep the byline and author's note, and also leave the hyperlinks active.
About the Author
Brandon Cornett is publisher of Home Buying Institute, the Internet's largest library of home buying advice. You can learn more about the mortgage loan process by visiting http://www.homebuyinginstitute.com
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