What are closing costs? These are the costs that are incurred when you by a house. This includes things like title insurance, the first months of house insurance, lender fees, legal fees, and everything in between. Your lender will give you a full list of costs – ours came out to be about $6,500 on a $200,000 house.
When we first talked to our lender, she said the sellers pay for closing costs in a majority of cases – it seemed so cut-and-dry. We thought, “Great, that’s saving $6,000!” and we went home excited. Only when we put in our first offer did we understand how these closing costs can ruin a real estate deal. Here’s why:
Most sellers don’t want to pay them: We’re in a seller’s market, where multiple offers are common and asking someone to essentially lose thousands of dollars is pretty much impossible. If there are two offers, and someone’s offering to pay all or even half of the closing costs, the seller is going to take that offer over yours (where they’d have to pay thousands of extra bucks they don’t have to!)
Adding them into the deal isn’t easy: If the seller won’t pay your costs, you can add them into the cost of the house. This makes it appear like the seller is paying the costs, but really, you’re just adding them into the house price. For example, our house price was $190,000. We added our closing costs of $6,500 onto the offer price, making the final house price $196,500.
This seems great, until the seller starts using your closing costs as a negotiating tool. Most refused to pay our closing costs, while others said they’d pay them but only if we went with a very high house price. It became so frustrating to deal with, having to negotiate back and forth, deciding who pays these darn costs!
It’s also difficult to fully estimate the costs, when you don’t have a proper “good faith estimate” from the lender and just a “guesstimate.” There’s a chance you could overpay or underpay on your closing costs if you loop them into the deal.
Appraisals can destroy your offer: So say you decide to roll in your closing costs as part of the house price. Seems fine – until the lender goes to appraise the property and finds it’s appraised for less than you offered. Suddenly you’re not allowed to pay $196,500 for a house that’s only worth $193,000. Now you’re stuck with the task of finding an extra few thousand dollars to pay the closing costs out of pocket. It’s the worst!
We actually lost one deal because the sellers liked the offer, but didn’t think the house could get appraised for that much. Because it was a multiple offer situation, they just went with someone who could pay their own closing costs.
We’re now sitting with an approved offer, but waiting to see if it’ll appraise (once we’ve gone through the excruciating task of negotiating inspection repairs). It’s a stressful place to be in, and not ideal.
So how do you avoid paying closing costs? You can’t avoid paying them, but you can avoid putting them into your deal by paying them out of pocket. We’re considering cashing our 401K’s to pay for them if we get into a low appraisal situation, and using some extra savings to pay for the costs. Remember, these costs are just part of the process of home buying.
Have you had any issues with the closing costs when buying a house? We want to hear about your experiences, so comment below and let us know!