Can I Avoid Paying Closing Costs?

Closing costs are part of any real estate deal and something that you need to budget for before signing on the dotted line. Understanding what closing costs entail will make budgeting for your home purchase much easier. 

Closing costs includes a variety of expenses that go above and beyond the purchase price of the property you are buying. While closing cost line items can vary by state and the type of property you are buying, they typically include:

• Attorney fees
• Title search
• Title insurance
• Property taxes
• Lender costs 
• Upfront housing expenses which includes homeowner insurance

Many of these costs are nonnegotiable, they have to be paid and the price is set. This includes fees such as a recording or transfer tax charged by your state or local government. Other fees can be negotiated, or you can shop around for a better deal, this includes items such as the lender’s fee, attorney fees and even homeowners insurance.

The amount you end up paying in closing costs will vary depending on the amount of money you are borrowing as well as your local tax rate and fees. On average, expect to spend between 2 and 5 percent of the purchase price. As an example, if you are buying a $400,000 house you will probably spend between $8,000 and $20,000 on closing costs. According to data from ClosingCorp, the average closing costs for a single-family home in 2018 was a whopping $5,800 including taxes.

Typical Closing Costs

Legally, if you are purchasing a home you should receive a loan estimate within three days from your lender once they have processed your loan application. This document should include an estimate of your closing costs. You should also receive a closing disclosure roughly three days before your closing date, this will have the final details of your loan and closing costs. 

Basically, there are three sections that make up the closing cost section of your loan. This includes lender fees, title company fees and prepaid costs. Here is a quick description of each:

• Lender fees: This section deals with all of the costs and fees that relate to the lender. This includes fees such as an origination fee, courier fees, appraisal costs, administrative fees, processing fees, and a credit check. Other fees can include underwriting fees, transfer taxes and even a flood certification if one is required. 

In addition, you may have to pay a discount point, and this will fall under lender fees as well. A discount point equals 1 percent of the loan amount and points are used to lower your interest rate. Discount points are not a requirement but can help lower your interest rate, whether or not you need one is a personal decision. 

• Title Company Fees:  According to industry data, roughly 70 percent of closing costs are related to the title. This is a fee that you can lower by shopping a variety of title companies to find the best deal. This fee includes a title search, title insurance and settlement services.

Lenders require homebuyers to purchase title insurance up to the amount of the loan. This protects the lender in the event someone claims that they have an ownership right to your home. This can vary from long lost relatives to work done on the home that has not been paid for by the previous owner leading to a lien against the property.

Most real estate agents recommend buyers also purchase owners title insurance to protect themselves against title issues. 

• Prepaid Costs: The majority of lenders require borrowers to set up an escrow account in order to pay homeowner insurance and property taxes. The standard is to have one year of homeowners insurance premiums paid at closing and two more months in reserve. You may also need to have two to six months of property taxes in escrow. It is possible to avoid an escrow account with some lenders if you have 20 percent or more for a down payment. 

Who is Responsible for Closing Costs?

In most cases, both the buyer and seller have to cover certain expenses at the closing. The sellers cover the real estate agent fees at closing while in some cases they may split or even pay in full some of the other closing fees. It all depends on your agreement in the purchase contract. 

Can I Avoid Paying Closing Costs?

While it is certainly possible to reduce them, it is unlikely you will close on a home without paying any closing costs. The main way to lower your costs is to shift them to the lender or the seller. 

It is possible to ask the sellers to raise the agreed upon asking price in exchange for a credit at closing to help with the closing costs. As an example, if you are purchasing a $300,000 home and had $8,000 in closing costs you may ask the sellers to up the price to $308,000 and give you a credit at closing. The seller still gets the same amount of money and you get to finance the closing costs into the transaction. 

You can also avoid or lower some closing costs by shopping around. While state and local fees and taxes are non-negotiable, you can shop fees such as property survey, home inspection, pest inspection and homeowners insurance.