Schools back in session, and fall is coming fast! So, remember early last year when I talked about closing costs? I even did a video on it as so many buyers were struggling with closing costs even if they had a down payment. Well, my friends, how the times have changed. If you remember that video, please forget it now because nothing I said about closing costs from early last year apply right now at all.
It is a different market, so let’s hash closing costs out again.
Even if you don’t remember that video, let me remind you about what closing costs are to begin. Let’s start with the other fund facts first…
Every buyer has fees to get into a home. I don’t care what the radio tells you, you can not buy a home without some skin in the game.
—First, you need earnest money. Earnest money shows to the seller that you are a serious buyer. Earnest money will be deposited to the title company. When you close, your earnest money goes toward your down payment, or your closing costs, and sometimes (only sometimes) you can actually get your earnest money back after closing. If you do not close, and if you back out WITHOUT a legal reason, then the seller has a right to all, or partial, of your earnest money. We will talk more about legal reasons later.
—Second, you need money for inspections. We talked about this recently… home inspections, and sewer scope inspections. You can also do a radon test, & a well test…depending on the property you are wanting to purchase. Inspections are done by 3rd parties, and they will want to be paid for their time, and expertise to come out and perform the inspections. I know… crazy talk… these are out of pocket funds you need upfront.
—Third, you need to pay for the appraiser. Remember that the inspections are for YOUR information. The appraiser is for the bank’s information. The bank wants to make sure it isn’t lending you more than the house is worth… you know… just in case you don’t pay your mortgage and they end up taking it back. The bank will only lend you either the purchase price OR the appraisal amount… WHICHEVER IS LESS. So no, you can not take out ‘extra money’ as part of your purchase…even if it is for something you want to do to the house. They don’t do that anymore because people didn’t use it for the house. It’s like your mom said, “it only takes one person to ruin it for everybody”, or in this case … thousands of people.
You can go to the website to read the blog we did on these in more depth.
Down payment… This is the amount required for the buyer to bring in depending upon the loan the buyer is using. Every loan has different requirements…
FHA – 3.5% of the purchase price
Conventional – 5% of the purchase price (there was also a 3% version)
USDA (Rural Development aka RD) – 0% as this is a 100% loan, but there are some location/home requirements on this one)
Down payment assistance – 0%, this is a 2nd loan. This is a loan program that assists buyers with the down payment requirement on their loan. It is a GREAT program especially for folks who have some money, but not enough for a down payment. It is a loan that has higher fees.
Most people are aware of the down payment portion, but they forget about closing costs. There are 28 people that are involved in the purchase & sale of a home, and because no one pays anyone for our good looks, or sparkling conversations, every one of those 28 people want to be paid.
For the buyer, Closing Costs are the costs associated with the buyers loan and legal transfer of the property to the new owner. Closing Costs for the buyer can also include ‘Buying Down Points’. This will increase the buyers closing cost amount that they will need for closing.
Today we are just talking about the Buyers side of closing costs. Give me a holler for the information on the sellers side of closing costs.
Every buyer is going to have a different amount of closing costs depending on their loan, how much their lender origination fee is, if there are any lender ‘junk’ fees, etc. For buyers the majority of their closing costs are going to be for the amount that they are being charged FOR their loan. Closing costs are really to pay for everyone who touches their file to help them get the loan to buy the home, and for the buyers portion of costs for the legal transfer of the homes ownership.
When the government was buying down interest rates, and rates were in the 2%-4%, closing costs were about 2%-2.5% of the purchase price of the home. However, the government has stopped buying down rates, and so they’ve gone up, and up, and up. To be honest, I’ve felt a bit like Chicken Little the past few years as this should have happened back in 2018….at least… but that is water under the bridge and none of us have a life jacket. So let’s deal with what we have …right now…
Closing costs for many buyers are going to be higher now than they were because your lender is going to want to use some, if not all, of those costs to ‘Buy Down The Rate’. These are called, Points. Each point is about 1% of the purchase price.
We have a client buying a home at $450,000. They are buying down the rate to 5%, but it is going to cost them an additional $9,000 in closing costs to get the lower rate. At $450,000, we got the seller to ‘pay up to 2.5% of the closing costs’, and yes, this sounds great. However, because there is no sugarcoating at my bakery, I’m going to tell you the truth… the seller never actually pays your closing costs. WHAT?! Yes, you read that correctly, but let me explain…
Purchase Price $450,000 (the amount your loan is based off of minus your down payment)
Closing Costs $11,250 (these are contributed by the seller off of their net)
Seller net — $438,750.
Seller paid closing costs means that the sellers are agreeing to a lesser net so that the buyer CAN FINANCE their closing costs into their loan. Yes, again, you read that correct. The seller does not actually pay your closing costs. The sellers are agreeing to net a lesser amount than the purchase price so that the buyer can finance those costs into their loan. The last couple of years of multiple offers and bidding wars above & beyond the listing price are pretty much behind us….at this time. The Bright side of rising rates is that buyers can get into a home without offering 20k over purchase price. Sellers are also willing to negotiate closing costs as part of the purchase/sale contract that the buyers can use to cover all, or a portion of their closings costs…..or to buy down points for a lower interest rate. Rising interest rates have been like a cold shower for the superheated market we have had, and let’s be honest… no one actually likes a cold shower. A lukewarm one? Absolutely, but a cold shower? Nope!
If you are a buyer, it’s a better time for you to get into the market now than it was the last few years. A lot of good people got burned with the way that the market was, and there was no salve or spray to help with those types of burns. We saw people offering WAY over listed price, waiving inspections, giving months of free rent back, offering their first born child, free tacos for life, etc… While all of this sounded great for sellers, most people who were selling their homes still needed to buy a new home, so it was just as bad for them when they were trying to get into a new home so a market like we had just caused a lot of bad feelings.
Our current market is a more balanced market which helps both buyers and sellers. We have had a lot of new Realtors jump in the market the previous couple of years, and they’ve never seen, or experienced a changing market like this. This market changed so quickly, it was like dealing with a teenagers mood swings! Many Realtors are still pricing homes based off of home sale prices from earlier this year, and that isn’t accurate. Realtors need to look at what homes are going pending at. What is the percentage of price drops? What is the average time on the market? (no more fast weekend sales!) From about May of this year to current… home prices have gone down on an average of about 10%… with some a bit less, and some a bit more. If you weren’t asking questions before, you should definitely be asking now! See my last blog.
It’s not all gloom & doom here though… a balanced market is better for everyone. There are pros for sellers as well as most of them want to buy a home. Other sellers are totally looking at, and accepting contingent offers again! I had one seller complain about the money he was ‘losing’ on the sale of his home, but forgot about everything he was gaining on the purchase of his new home. Once he looked at both sides, he was actually much happier that he waited. Sometimes we can project out what we think the market is going to do, and sometimes we really can’t. This current market is so volatile that we are on a quarter by quarter basis. It’s like petting a kitten who wants you to rub its belly… do you, or don’t you? There is no magic 8 ball for this crazy…. just me… and my family likes to stick my crazy on the porch with a drink. So, that’s where you will find me, and I am always happy to help with your next home adventure!
Next home buyer & home seller classes (in person & online) are available at:
