How to Lower Closing Costs When Buying a Home

Buying a home involves various expenses beyond the purchase price, known as closing costs. These fees can represent a substantial financial outlay for buyers, ranging from 2% to 5% of the home’s purchase price. Understanding them and employing strategic approaches can lead to substantial savings.

Understanding Your Closing Costs

A thorough understanding of your Loan Estimate (LE) and Closing Disclosure (CD) is key to navigating closing costs. These standardized documents from your lender offer transparency regarding your costs. The Loan Estimate, received within three business days of applying for a mortgage, details estimated costs. The Closing Disclosure, provided at least three business days before closing, outlines the final terms and costs.

Closing costs fall into categories like lender-related fees, third-party service fees, government recording fees, and prepaid items such as property taxes and insurance. The Loan Estimate categorizes these, distinguishing between “Services You Cannot Shop For” (Section B) and “Services You Can Shop For” (Section C). Section A details origination charges, which are fees charged by the lender for processing the loan.

Compare Loan Estimates from different lenders to identify fee variations. Once you receive your Closing Disclosure, review it against the last Loan Estimate to detect discrepancies. This comparison ensures final charges align with initial estimates, allowing you to question unexpected increases before closing.

Negotiating with Lenders

Negotiating with your lender can reduce certain closing costs. Lenders charge fees for originating a loan, such as origination, underwriting, and application fees, which typically range from 0.5% to 1% of the loan amount. These are often found in Section A of your Loan Estimate. Comparing offers from multiple lenders provides leverage to negotiate lower fees.

Another strategy involves lender credits. A lender may offer a credit towards your closing costs in exchange for a slightly higher interest rate. This option reduces the cash needed at closing, though it results in higher monthly payments over the loan’s life.

Shopping for Third-Party Services

Many closing costs are from external vendors, and you can shop around for these. The “Services You Can Shop For” section (Section C) on your Loan Estimate lists these items. Common examples include title insurance, appraisal fees, survey fees, inspection fees, and attorney fees.

The lender is required to provide a list of service providers, but you are not obligated to use them. Obtaining multiple quotes for each service, such as title insurance, can lead to considerable savings, sometimes up to hundreds of dollars.

Utilizing Seller Concessions and Credits

Buyers can negotiate with the seller to contribute towards their closing costs, known as seller concessions or credits. The seller agrees to pay a portion of the buyer’s closing costs as part of the sales agreement, reducing the cash the buyer needs at closing.

Limits on seller contributions vary by loan type. Conventional loans have limits from 3% to 9% of the purchase price, depending on the down payment. FHA loans allow up to 6% of the purchase price, while VA loans limit them to 4%. These contributions can cover various buyer expenses, including the VA funding fee or certain prepaid items.

Strategic Timing and Loan Options

The timing of your closing date can influence prepaid interest. Prepaid interest covers the period from your closing date to the end of the month, as your first mortgage payment is due on the first day of the following month. Scheduling your closing towards the end of the month minimizes prepaid interest, reducing this upfront cost.

Certain loan programs offer advantages regarding closing costs. VA loans, for eligible veterans and service members, often feature lower closing costs due to specific regulations. These loans do not require private mortgage insurance and limit certain allowable fees. The VA funding fee is a notable closing cost for VA loans, though it can sometimes be financed or covered by seller concessions. Some lenders or government entities may offer special programs, grants, or incentives to help cover or reduce closing costs.