Buyers and Sellers customarily pay certain closing costs in a real estate transaction. The buyer’s costs can be paid by the buyer at closing, the buyer’s lender, and/or the lender. Buyers should discuss the various options for covering their closing costs early in the process with their lender and agent; so your preferred closing cost strategy is determined before you make an offer on a home.
In Southwest Colorado, the closing costs are typically allocated as follows: 1) All lender fees are paid by the buyer; 2) The title closing fee is split evenly between the buyer and seller; 3) The title insurance that protects the buyer is paid by the seller; 4) Title insurance that protects the buyer’s lender is the buyer’s responsibility; 5) Appraisal fees are paid by the buyer; and 5) The closing fee associated with handling the loan documents is charged to the buyer. Although these allocations are common and customary; the buyer and seller can agree to allocate the closing costs anyway they would like.
If a buyer wants to shift responsibility for some or all of their costs to the seller; they typically request that the seller provide a credit for a specific amount, rather than reallocating specific individual costs from the norm. The seller will subtract the buyer’s requested credit from the price offered to determine the net purchase price. As an example, if one buyer offers $200,000 for a home without a closing cost credit and another buyer offers $202,000 with a $2,000 credit; the offers are the same to the seller as it relates to the purchase price. The bottom-line for the buyer in this example is whether they want to buy the home for $200,000 and bring in an additional $2,000 at closing or pay $202,000 and hold onto their $2,000.
Another option for a buyer to avoid paying all or a portion of their customary closing costs is to accept a higher interest rate on their mortgage in return for a credit from their lender. A 1/8% increase in the rate of a $300,000 loan can generate a $1,500 to $$2,000 credit with a payment increase of less than $20 a month. Lenders offer a range of rates daily with corresponding costs for lower rates and credits for higher rates.
As stated earlier, discussing your closing costs options and deciding on a strategy should be completed prior to making an offer on a home. In some cases, the best option is for a portion of your closing costs to be paid by you, your lender, and the seller. Rates and corresponding credits/costs from lenders change daily; so I recommend that you lock your rate along with your cost/credit at the time the contract is negotiated, otherwise, the portion of the closing costs you expect the lender to cover will not be certain until you lock.