Housing Wire recently posted a story that was a “no duh!” moment for me. They claimed that “Most Millennials Don’t Know About Closing Costs.”
As an agent who works with a high number of first-time buyers, I run into questions about closing costs all the time. I find that the majority of homebuyers (not just first-timers) are ill-prepared for the high costs that go along with obtaining a mortgage loan.
Closing costs can run upwards of 3% of the total of your purchase price. And there are many, many factors that have to be taken into account when calculating closing costs.
Your lender will likely charge an origination fee (it’s how they earn a living). The fee will vary based on your loan type, your down-payment percentage, and it can vary based on risk (ie- your credit score). The attorney and title company will have to be paid to close the loan. There will be appraisal fees, flood certification fees, and credit check fees. There could also be warranties, HOA setup fees, and other processing fees.
On top of that, there are “prepaid” items that have to be collected at closing. For instance, your lender will likely need 1 years worth of homeowners insurance to be prepaid, you will likely have to deposit several months of taxes into escrow as a safety cushion. You may also owe interest on the next month’s mortgage if you close early in the month.
If you are buying a foreclosure, a short-sale, or a new construction home, the fees could grow as title insurance may fall to the buyer as opposed to the seller. (In our area sellers often cover this cost when buying a resale home, but not in the situations previously mentioned.)
And you can’t forget about out-of-pocket fees that occur before settlement. Home inspections are always paid for at the time of service.
The biggest fallacy I’ve been running into recently is the idea that the seller is the one who should pay these fees. That is simply not the case.
A few years ago, when we were in a weaker market, it was commonplace to negotiate for the seller to cover some or even all of your fees. But that was then. In the red-hot Nashville real estate market at the moment, it is almost impossible to get the seller to help with closing costs… they simply don’t have to.
Think of it this way: most of these fees occur because you are getting a loan. If you were paying all cash for the home, the majority of the closing fees would not be incurred.
All-cash buyers aren’t the norm here, but they do account for over 20% of areas sales. It can be incredibly hard to compete against a cash buyer – and multiple offer situations are common now.
As a buyer entering this market, you must be prepared to present your highest and best offer if you encounter a multiple offer situation. Last month both of the properties that I listed received four or more offers within 2 days of being on the market. Both properties sold above asking price.
Multiple offers and bidding wars aren’t a new phenomenon in Nashville. It was occurring in the early 2000s (pre-recession) too.
The state of the market necessitates that as a buyer you must do a few things before jumping in
First, you MUST speak to a lender regarding loan pre-approval before you begin looking at houses. You must obtain a written pre-approval letter. You can not write a competitive offer without one.
Second, you MUST establish a working relationship with a Realtor that you trust. Our market is moving so incredibly fast. You need and deserve a representative that:
- Understands what’s happening in the market
- Is willing to sit down with you one-on-one to form a gameplan
- Has software that will notify you of new listings quickly
- Has availability to book appointments and show you new listings with short notice
- Can show you comparable sales scenarios in a flash so you can understand whether the asking price is reasonable
- Has access to electronic signature software that can facilitate quick turn around on submitting offers
- Has a good reputation and proven track record of sales
I hope you are thinking to yourself “okay, okay, I get it! This is important!” Buying a house can be stressful, but we can help.
If you are ready to take the next step, call on us to schedule a consultation, then call on one of our recommended lenders to get a handle on your budget, your pre-appoval letter, and your closing costs.
