Closing Costs: Why They Can Destroy a Real Estate Deal

closing costsWe’ve been on the house hunt for about a month, and we’ve discovered one major hiccup that’s become the issue in every single one of our house offers. The dreaded closing costs.

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!

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The 23 Questions We Asked at Mortgage Pre-Approval

Preapproval

The first step we took in our house hunting is mortgage pre-approval. We needed to know how much mortgage we could get. We found our mortgage lender, Churchill Mortgage (and our awesome team member Sue F.),  through a friend and booked a meeting.

We weren’t sure if we wanted to even go with this company, so it was our time to interview. Remember, you don’t have to pre-approved with the first lender you see – just make sure you don’t go through the credit check and then decide against them. That’s a check you’ll never get back!

Here are the questions we asked the mortgage lender in the first pre-approval meeting.

Questions about the broker/lending company:

  • What does your company charge for fees?
  • What’s a good faith estimate, and does your company provide it?
  • Do you guarantee your good faith estimate?
  • When do you do hard credit checks, and what’s the process?
  • Have you worked with foreclosures?
  • How long will you hold my pre-approval for?

Questions about mortgages:

  • What does “APR” mean?
  • What interest rates can we expect?
  • How long will you lock those interest rates in, or will you lock them in at all?
  • How does private mortgage insurance (PMI) work?
  • Is there a way to not pay the mortgage insurance, or to lump it into the mortgage amount?
  • Can we do lump sum payments on the mortgage balance?
  • What are mortgage points, and are they a good fit for us?
  • What are origination fees?

Questions about the home purchase process:

  • How much will closing costs be, and who pays for them?
  • How do we pay for inspections, and how much will they be?
  • How do appraisals work?
  • How much will an appraisal be, and who do we pay?
  • Are there first-time homeowner grants available?
  • How does title insurance work?
  • Do you have any recommendations for home insurance providers?
  • How do property taxes work, can we pay them monthly, and where do we pay them?
  • Do we have to pre-pay for any services before we move into a house?

Here’s what we found out during the meeting that we think is important.

Ask how much: The biggest question we asked at the end of the meeting was “How much are we going to pay out of pocket when we close on this house?” The answer (if the seller pays the closing costs), was about $1000 for all inspections and appraisals.

It’s fine to say “I have no idea what that means”: The best thing we did in that meeting was to clarify, clarify, clarify. People in this business have been doing it a long time, and use acronyms and lingo we didn’t understand. So we were okay to interrupt and say “We don’t know what that means.” A good lender will answer everything clearly.

Avoid the pressure and take a beat: They wanted us to sign on the spot and get started. So we just took five minutes in the hallway of the office to talk about whether we were okay with these lenders and if we were fine with the credit check. We signed once we’d both agreed we were comfortable.

After the pre-approval meeting, we decided to go with this lender. Take a look at this post to see what we had to provide to the lender once we decided to get officially pre-approved, and how the whole process worked.

3 Ways To Know How Much House You Can Afford

How much house1

We’re newlyweds living in Tennessee, and we’re currently on the hunt for our first house. I’m from Canada, and my husband has lived in Tennessee for quite a few years.

We’re house hunting because our landlord is selling our adorable 700 square foot rental home. We’re happy to be in a new house, especially since the sewage system backs up and the kitchen boasts a tiny portable dishwasher.

So it’s time for us to become first time homeowners – and whoa is it overwhelming!

The first step is figuring out how much you can afford. Here’s how we decided how much house we we could buy:

1. Know Your Monthly Payment: 

We’re pretty good budgeters, so we know we have around $1100 left each month after all of our bills are paid. So we fiddled around with our favorite tool in the world, the Zillow mortgage calculator to find our maximum house price.

Here’s what you should factor into your monthly house payment, and a lot of it is stuff nobody ever explained to us:

  • Actual monthly mortgage payment (principal and interest): The basic Google mortgage calculator will do this for you. Remember that your mortgage amount is after downpayment. So our $180,000 house will have a mortgage of $171,000 (when you factor in our downpayment of $9000).
  • Homeowners Insurance: This is insurance to protect you and your house in case of disaster. It means you’re covered if someone slips on your floor and sues for injuries, or if a rain storm damages your roof – but lets hope neither happens! It’s about $1000 a year or more, split into monthly payments.
  • Private mortgage insurance (PMI): You will have to pay this, unless you have a 20% downpayment. Our rate is .52% of the mortgage, split up into monthly payments. Rates differ by lender.
  • Property taxes: Find this numbers on the house listing you’re looking at on Zillow, then split that up into 12 payments per year. Our annual payments will be around $1,500-$1,800 (that’s $125 monthly), and they’re paid to the county you live in.
  • Homeowner Association (HOA) Fees: Most newer communities have this, and it pays for the basic maintenance and enforcement in a community, but you’re still responsible for your own land. It’ll be anywhere from $15-$50 a month.
  • Condo fee: If you buy a condominium, you’ll pay a monthly fee for a management company to take care of your property. That means any shared spaces, like roofs, lawns, and waste management. Expect upwards of $100 a month

2. Find Your 5% Downpayment: Yeah, easier said than done right? But knowing how much you have to spend as your 5% makes it easy to see how much house you can pay for. If you have more than 5% to put towards a house, good on you!

We also found out about the Tennessee Housing Development Agency Great Start Loan. It’s a “forgivable loan” which means you don’t have to pay it back if you live in the house for 10 years! That’s a free downpayment, people! You have to get an Federal Housing Association FHA loan though, instead of a conventional loan.

If you get an FHA loan (Federal Housing Administration) at 3.5% down, the interest rates and PMI’s are usually higher than conventional loans. Plus, you have to pay PMI for the life of the house, unlike normal loans which cancel the PMI after you’ve paid 20% of the mortgage principal. Still, it’s a good option if you’re cash strapped.

3. Add Up The Extras: All the little extras add up, especially if you’re buying a house that needs work. Here are some extras we’re adding into our budget. Remember that these are out of pocket expenses, you can’t put them in your mortgage. So make sure you have enough cash for a full downpayment plus another $1,000-$2,000 for extra expenses.

  • New furniture – Budget a few hundred dollars or more more. You’ll want new furniture if you purchase a larger house than what you’re used to, and especially if it has a bonus room! We’re planning on eventually buying a guest bed, because we’re moving from a one bedroom house. Remember you can purchase these pieces over time.
  • Moving truck and supplies – Budget a few hundred for this if you rent a truck and supply your boxes, and budget more if you plan to hire a moving company (upwards of $1000 depending on how far you’re moving).
  • Paint: If you need to repaint most rooms in the house, you can bet around $500 will be spent on paint and supplies (less if you already have painting tools and supplies).
  • Appliances  – Budget about $1,200 for a washer/dryer, because they usually get taken when the seller moves (we’re planning on paying less by buying them used). If you already have those and all appliances are in good working order, that’s awesome!
  • Cleaning- Budget $100-$200 for washing down surfaces, renting carpet cleaners, having the ducts cleaned, or pressure washing the house. It all adds up.

Once you’ve figured out what you can afford, don’t shop yet! Keep checking our latest posts to see each step of the home buying process as we go through it.