"Closing costs" is a confusing term. Depending upon who you're talking to, it can encompass various monies which will be required of a buyer in order to get up from a closing table with a new set of keys (hopefully with a Heritage Real Estate keyring attached). There are numerous charges and fees involved and buyers frequently get the terms mixed up. More often than not, neither lenders nor Realtors thoroughly and clearly explain things to the buyer.

Firstly, there is a difference between "closing costs" and "down payment," something first-time buyers frequently misunderstand. I recently had a deal go south because the buyer's agent didn't bother to explain to him that "zero down" didn't mean there were no costs involved. Imagine his surprise when, two weeks into our contract, he learned he had to come up with $4,000 in closing costs.

Your "down payment (if you have one)," although paid at closing, is not actually a closing cost.  It is a chunk of money paid directly toward the principle balance of the price of the home, thus reducing the overall indebtedness to the bank.  A $100,000 contract price, with a $5,000 down payment, means the loan amount will be $95,000. Depending upon your loan, the down payment can be anywhere from 3% to 20%.  FHA loans are 3.5% down. Conventional loans generally run 3, 5, 10, 15 or 20% down, depending upon the lender.

But none of these down payment amounts is the sum total of what a buyer will pay. Like the buyer mentioned above, a USDA loan, which is "zero down," still has closing costs which can easily be $4000 or more, depending upon the lender.

At its core, the term "closing costs," as many banks define it, is simply the fees the bank itself charges for doing you the favor of loaning you money, on which they will then charge you interest for the next 30 years. Many lenders will quote closing costs at $2000 or less, but they're not telling the whole story.

In addition to the specific costs charged by the bank itself, there are numerous other charges the buyer will pay before those new keys are jingling around in his pocket. These include, but are not limited to: home inspection, radon inspection, pest inspection, mold inspection, septic inspection, appraisal, survey, title insurance (owner and lender), and "pre-paids," which are property taxes and homeowners' insurance paid up-front, and in advance (often as much as a year), at closing.  Many lenders only quote the very minimum costs the law requires them to, thus making their closing costs seem more enticing and affordable than some other lender's, who is more forthcoming about what is really going to come out of the buyer's pocket when all is said and done.

"Well," you might ask, "can't the seller help with closing costs?" Yes, she can. But there are limitations there as well, depending upon the type of loan, and the bank's own rules (known as "overlays," which we'll get to another day).

On an FHA loan, for example, the seller can only contribute up to 6% of the total purchase price. So, for instance, on a house priced at $50,000, there would be a maximum of $3,000 in seller assistance (aka "concessions"). For most lenders, the closing costs would be higher than that, so the buyer would still be paying some closing costs, plus a 3.5% down payment, in order to get her loan. On a $50K loan, she could easily be shelling out some $3,000 or better at closing. No assistance is allowed on the down payment portion of an FHA loan.

It's also important to note that, even if the seller is willing to contribute to the buyers' "closing costs, pre-paids, and inspections," they don't do so until the sale reaches the closing table; the payment comes out of their selling proceeds, rather than out of their pocket up-front. So even if the seller agreed to pay every single cost incurred by a buyer (which never happens), the buyer will still have to fork over money initially for things like the appraisal and inspections. He would then be refunded that money at closing by the seller. (Of important note here, some lenders will not allow buyers to get money back at the table, or may have a cap on the amount they can receive.)

In a nutshell, fees normally paid by the buyer at closing, which are often lumped under the umbrella definition, "closing costs," are:

Closing costs – what the bank charges for making the loan, including application fees, paper shuffling fees, title search fees, and lord-knows-what-all-else….  These charges are the basic charges the lender must, by law, disclose to their buyers in writing.

Appraisal – this is paid up front by the buyer to the lender, and runs (depending upon the lender) between approximately $450-$600. This can be charged to a credit card. Most, but not all, banks include this in their quote of closings costs. **Many buyers confuse "appraisal inspection" with "home inspection" and do not realize these are two separate charges.

Inspection fees – the buyer is entitled to any and all inspections he wishes, but all fees are paid up front by the buyer to the inspector. Very few lenders will mention these costs to the buyers. The basic inspections (home/pest) run some $400-$500 and up. If you add on mold, septic, etc., the costs go up from there. Surveys can be quite pricey.

Pre-paids – Property taxes and homeowners' insurance paid in advance (usually 6-12 months) by the buyer at closing. Obviously, these charges vary based on the value of the home, and the insurance company and coverage selected by the buyer for their homeowners' policy.

Any or all of these can be paid for with seller assistance at closing, but the most commonly assisted costs are "Closing costs and pre-paids." Few sellers will agree to assist the buyer with inspecting the home.

Each lender is different. Each has various costs associated with making the loan. Each has different "overlays," or rules, about their loans and what assistance is allowed.  Many do not disclose the whole story to the buyer in terms of what it's going to cost them start to finish. In the case of a lender who quotes every charge a buyer might incur along the way, it can make their sum-total "closing costs" quote seem higher than some other lenders, while their actual charges may be less than the initial quote, and often less than other lenders when the whole story is told.

It is a Realtor's job to understand the ramifications of these charges and what they mean to her buyer, particularly the first-time home buyers. A good Realtor will make sure her buyer is comparing apples to apples. If she tells you she found this awesome lender with only $1500 closing costs, you can suspect the whole story isn't being told.

If your Realtor isn't helping you with these questions, on the right questions, take matters into your own hands. Ask your lender, "Does that $1500 closing cost quote also include the appraisal? What about the pre-paids? How much will my inspections be? What other charges can I expect to incur along the way?"

Being able to clearly understand these costs, and find a lender that fits your financial needs, not only smooths this very stressful process for you, it also saves you money, and gets you to the closing table, instead of the deal falling through because you didn't understand what that new set of keys was going to cost you.

A Realtor who can walk you through this process patiently and thoroughly is a stand-out agent. And it's just one of the many things which truly make Heritage Real Estate…

Miles Above Mediocrity.