How to Reduce Closing Costs for Buyers

You did it! You have saved up for a down payment and are ready to purchase the house of your dreams. But before you make an offer on a home, we recommend learning more about closing costs. In this article, we’ll help you learn what to expect as a buyer at closing and how to reduce your out-of-pocket expenses.

Which Closing Costs Are Buyers Responsible For?

Buyers are usually responsible for paying for a lot of different closing costs. These tend to amount to anywhere from 3 to 5 percent of the total purchase price of the house. For example, for a $200,000 home, closing costs for the buyer can be anywhere from $6,000 to $10,000. The variation can be explained by the cost of taxes and insurance. Property taxes vary greatly from state to state and county to county. Fortunately, it’s easy to estimate how much these are once you know your property address — just ask your real estate broker.

Closing costs vary and not all of them may apply to your situation; but here is a list of expenses that are typically part of closing costs:

  • Appraisal fee
  • Loan origination fee
  • Prepaid interest
  • Prepaid insurance
  • Title insurance
  • Credit report fee
  • Bank processing fee
  • Recording fee
  • Notary fee
  • Survey fee
  • HOA transfer tax
  • Property tax
  • Underwriting fee
  • Processing fee
  • Attorney fees

How to Reduce Closing Costs

Many home buyers have a difficult time coming up with the money for closing costs, especially after they have already saved up for a down payment. Fortunately, there are a few things you can do to minimize your out-of-pocket costs at closing.

1. Shop Around for Your Loan

Many of the closing costs are related to your loan. For example, you have to pay a loan origination fee just for getting a mortgage. These fees differ from lender to lender, and it may be worth your time to shop around for the best deal.

2. Ask the Seller to Pay for Them

In some cases, you can ask the seller to pay for your closing costs, and he or she will gladly do so. This is especially the case in a buyer’s market. When you ask a seller to pay for closing costs, it’s called a seller’s concession in your contract. If the seller doesn’t want to pay closing costs, then your real estate broker can negotiate on your behalf.

3. Add the Closing Costs to Your Loan

Many times it’s possible to add a significant portion for your closing costs to the loan you’re already getting anyway. An increase of $5,000 to the loan amount isn’t very noticeable for your monthly payments, but it’s very helpful when you don’t have to come up with that much cash at closing.

It’s important to understand that every lender has different rules. For example, a VA loan allows you to finance all of the closing costs. On the other hand, an FHA loan limits the seller’s concessions towards closing costs to 3 percent of the loan.

When it comes to conventional loans, you’ll have to ask your lender what the rules for paying closing costs are. There may be a limit for seller’s concession that’s anywhere between 3 and 6 percent of the total loan amount.

4. Buy a Cheaper Home

This option may seem like a no-brainer, but most people don’t consider it right away. If you purchase a home that costs less, you’ll usually end up paying less money in taxes and insurance. This in turn can reduce your monthly payment amount as well as your closing costs quite a bit. Sometimes a small change in location can make a big difference, too. For example, you may pay significantly less in taxes if you move outside of the city limits or into a neighboring county.