It’s closing time: Home buyers—eager to get the keys to their new place—must first cover myriad costs, including attorney fees, lender fees, mortgage insurance, a title search, recording fees, real-estate taxes, survey costs and an appraisal (sometimes two on a jumbo loan).
“Closing costs can vary depending on lenders, the state you reside in, the price of the home, and even the day of the month the closing takes place,” says veteran real estate investor and Alabama attorney, Dan Boswell.
Jumbo loan borrowers-where amounts exceed $424,100– often face the steepest closing costs because many fees are calculated using the percentage of the loan amount.
Borrowers can get a sense of the closing cost they will incur with a good-faith estimate document, which federal law require lenders to provide within three days of the loan application. Lenders cannot change their own origination fees, but they are given a 10% leeway in estimating third-party charges, like appraisal, survey, inspections and titles services.
Image Credit: Birmingham Business Journal
Differences vary not just by state but by individual localities, says Valley Title and Closing CEO Wendy Worley.
“The day of the month when the mortgage closes can also affect costs,” says Worley. If you close on Nov. 5, you have to pay the per diem interest from the 5th to the 30th, but if you close on Nov. 28, it’s only three days.
Borrowers can also reduce out-of-pocket expenditures by wrapping the closing costs into the loan, but lenders will charge a slightly higher interest rate. When considering that option, borrowers should balance how much cash they can bring to the closing table versus how long they plan to stay in the home.
To ensure the most optimal outcome, follow ACRE’s four tips for Alabama home buyers:
1. Shop Around. “Apply with at least 3 lenders to compare origination fees quoted in good faith estimates,” says Boswell.
2. Relationship Discounts. “In many cases, lenders offer lower origination fees for their customers,” says Worley.
3. Closing Attorney. Many borrowers stick with a lender-appointed attorney to represent them at closing, but they are not required to so and can hire their own. Oftentimes, attorney fees can vary upwards of $500. In fact, KC Conway, ACRE’s Director of Research and Corporate Engagement and CCIM’s Chief Ecnomist, suggests spending a little extra on your closing attorney. “I recommend spending the extra $500 on your own attorney and making sure easements (like fences) are looked at and HOA documents are reviewed and explained to the home buyer to know they can’t park a camper in the driveway or put up /a basketball goal. There is a lot more to consider from a legal perspective in a closing than the bank’s mortgage. This is an area not to be cheap on,” said Conway.
4. Right to Reports. Buyers have the right to appraisal reports three days prior to closing. Why is this important? There are a lot of mistakes in appraisals. An appraisal mistake can cause lenders to recalculate the LTV (Loan to Value). This could potentially impose mortgage insurance premiums and other costs, due to an appraisal error or bad comps. Review and challenge the appraisal. If the bank reviewer accepts an appraisal with mistakes, the borrower remedy is to file a complaint with the CFTB and the appraisal licensing board. It is amazing how an informed borrower with the basis to challenge a bad appraisal gets result. “This is where your broker is a huge value-add. Brokers know residential markets better than appraisers. They know the neighborhoods better than an appraiser trolling for comps to dump in a Fannie Mae or FHA form,” said Conway (a 30 year MAI veteran).