Q: Marsha, my wife and I are looking to purchase our first home together. At our Realtor’s direction, we went to a lender for loan pre-approval. We were shocked to learn that in addition to our down payment, we will have to pay “closing costs.” Can you explain what these additional costs are?
A: I can understand the sticker shock. Closing costs are an expense you have to factor in when buying a house. There are legitimate costs that sellers and buyers can expect to pay at the close of a real estate transaction. And there are costs that just seem to be there for no reason. A real estate transaction involves a great deal of money exchanging hands. It’s no surprise that many hands are held out and some of these hands get grabby-grabby.
The buyer’s closing costs are divided into recurring costs and nonrecurring costs. A recurring closing cost will not only be paid at closing but will recur throughout your home ownership. This would include property taxes, insurance, homeowner’s association dues, and possibly private mortgage insurance (PMI), if the lender requires it.
The costs buyers need to inspect and question are the nonrecurring closing costs. For the majority of us, purchasing a home is a rare occurrence, perhaps taking place once or twice in a lifetime. Lots of disclosures, paperwork, and unfamiliar vocabulary adds to the confusion. The buyers can begin to feel as if they’re constantly being asked to sign here and hurry up.
Examples of buyer’s closing costs include lender title insurance, credit report fees, escrow fees, recording fees, and homeowner’s association transfer fees (if a condo). Besides title and escrow fees, the majority of closing costs are loan related, such as underwriting fees, application fees, mortgage rate lock, loan processing fee, and a loan broker rebate. You may choose to pay points which will lower your mortgage interest rate. It’s these mortgage fees and costs that can get out of hand and seem like junk fees. Do not be embarrassed or afraid to challenge charges. Make sure your real estate agent, as well as your lender, behaves as your advocates and explain all charges to you. Ask to have unwarranted charges removed.
Our government has been aware of the consumer’s vulnerability to excessive loan charges for decades. The Truth in Lending Act (TILA) was enacted in 1968. In 1974, the Real Estate Settlement Procedures Act (RESPA) was enacted. These protections have been adjusted and improved ever since to inform and protect consumers. A game-changing disclosure act went into effect in 2015. This one is called TRID. It’s an acronym of acronyms: TRID stands for TILA/RESPA Integrated Disclosure act. Borrowers are required to receive a loan estimate (LE) at the beginning of the process and a closing disclosure (CD) that states all costs before the loan closes and the property is transferred.
It is crucial that buyers and sellers question and attempt to understand these disclosures. Closing costs will never go away. Ben Franklin said, “Nothing is certain, except death and taxes.” In today’s world, he would have added “and closing costs.”
Marsha Gray, DRE #012102130, NMLS#1982164, has been a real estate broker in Santa Barbara for more than 20 years. She works at Allyn & Associates, real estate services and lending. To read more Q&A articles, visit MarshaGraySBhomes.com. She will research and answer all questions submitted. Contact Marsha at (805) 252-7093 or MarshaGraySB@gmail.com.