Real Estate Agent and Trainer, Robert Rico, explains what closing costs are, how important it is, who pays for them, and what’s included. Do you want to see more video blogs? Subscribe here!
Welcome back to this week’s installment of the CA Realty Training blog! This week we’re learning about closing costs, and how they can impact a real estate transaction.
It’s very important that you know about closing costs – the more information, the better, to give you an edge over the competition who might not be as well-versed. Today, we’re going to focus on how they affect the buyer’s side of the transaction and how the costs may end up adjusting the mortgage itself.
Most lenders generally take the lead on explaining closing costs, but it’s always helpful to know this so you can advise your buyers and keep the deal going, even if that means switching lenders. A lender will never suggest switching away from themselves, but sometimes it can be in the buyer’s best interest to choose a different financial institution or even mortgage broker.
In some types of real estate deals, depending on the loan, buyers sometimes have to have their down payment, and cash to close – called CTC in the mortgage world. So what do you do if they don’t have the cash for both down and CTC?
Let’s say you’re running a typical real estate transaction, and it’s going very smoothly. You’ve shown your client some houses, they chose one they loved, and put in an offer. Their offer was accepted, so they’re in escrow – next comes the part of dealing with a lender. The lender has done their research, and they advise that the buyer get an FHA loan – only 3.5% down payment!!
What the lender may not mention, or what may halt the deal in its tracks, is the closing costs. This cost can range anywhere from 2-3% of the average home transaction – almost as much as the down payment on an FHA loan!! On a $600,000 house, 3% is $18,000 — a fair amount of money for most people. Especially people that have just set aside $21,000 for the 3.5% down!
$18,000 gets split into a lot of smaller fees – some of them are only $20 or so, but all those $20 fees add up! There are little things like courier fees, medium fees like appraisal fees, and big fees like impounded property taxes or prepaid mortgage insurance.
So what do you do if the buyer simply does not have the cash to cover the closing costs out of pocket? Well, there are a few options — it all depends on the type of market and the type of deal that’s going on.
Sometimes, and this does happen when the market supports it, the buyers can ask the sellers for a “closing cost credit” — basically, they are asking the sellers to pay the escrow and associated closing fees. In a buyer’s market, or with a really difficult deal, this might just be the weight that tips the scales in your favor. The sellers are more motivated because their house is not getting offers, so they are more likely to accept an offer with a closing cost credit.
Another option, and this is much more likely if it’s a seller’s market like the current one, is to search for a “zero closing cost” loan. We put air quotes because it’s never truly zero — either the loan amount or the interest rate will be higher to make up for the lack of buyer’s funds. You have to watch the loan-to-value ratio, though, or that method is not going to work without more down payment. However, it’s less expensive to increase the down payment, than pay the whole closing costs out of pocket. Increasing the loan interest rate may also work, if the buyers have any room in their debt-to-income ratio — a higher interest rate means a higher monthly payment.
Don’t let your deal fall apart over either of these loan scenarios – this is why we recommend keeping in touch with a good, creative mortgage broker. They may advise a different financial institution, a combination of financing, or some other creative strategy to get your buyers the home of their dreams.
So to sum it all up – when you’re going to close a deal, always keep the CTC in mind — how much is it, and how much do your buyers have? Are they locked in on their financing or would they consider switching? You want the deal to go through: you want the buyers to get their house, and you want your commission!