Let’s talk about closing costs.
It’s a scary concept just because there really aren’t any short and sweet answers as to what they are. In the most simplistic way to explain it, they are the costs associated with buying or selling a home. Whether you are buying or selling, these costs are something you need to be aware of; even though they are super different depending on which side of the transaction you find yourself on.
As a buyer using your VA Loan, you may not realize these costs are still a substantial factor in your purchase. The VA Loan does not require you bring a down-payment to purchase a home, but you still incur closing costs just like any other loan type. Closing costs consist of title fees, loan costs, prepaids, impounds, and realtor fees.
Title fees are the fees associated with transferring the title (deed) of the home into your name, and the title company providing title insurance on the property (think CarFax for a house, that’s what the title company is insuring). These fees are applicable for both buyers and sellers.
Loan costs are only applicable to you if you are on the buyer side of the transaction and are taking out a loan for the home. Loan costs comprise of things like, loan origination fees, prorated interest (based on your closing date), flood certification fees, document fees, underwriting fees, VA fees, and appraisal. These are some of the costs involved, they vary by lender to a degree so there is not a set formula anyone can provide until we have actually begun the home buying process.
When you buy a home you have to prepay certain items, with the VA loan it is normal for there to be a processing period between payments. So any and all prepaids are prorated based on your closing date, and you will typically prepay an additional month of HOA, insurance, interest, and taxes as part of your closing costs. For example if you close on the 15thof a 30 day month, you would pay from the 15thto the end of that month as the proration, plus one additional month to get you to when your first payment is due. For home owners insurance, in most cases you also prepay one year of your policy as a closing cost.
Impounds are the amounts taken from your monthly payment and held for you by your mortgage company to pay your taxes and insurance when they come due. Impounds can be confusing because in the case of closing costs, the act of prepaying your home owners insurance for one year is impounded (held on your behalf)… so the term prepaids and impounds can be used interchangeably in some cases.
Realtor fees, are 100% between yourself and your representation, there are no hard and fast rules, they are solely dependent on what you and your representation agree on. So be sure you have a clear agreement with your representation as this is a great example of how who you work with can potentially impact your bottomline.
All in all when you are buying a home, typically a good rule of thumb is to plan on your closing costs being about 3% of the purchase price. It is possible to negotiate getting the seller to give you a credit to pay towards these costs, this is when who you work with really matters – as it is up to your Realtor to negotiate this and the ability to do so is dependent on skillset, experience, and the market conditions when you purchase. You want to be able to trust your own representation in the transaction to ensure you are getting the best possible outcome availble for you. Keep an open and honest conversation with your real estate agent about these costs is crucial.
When you are selling a home, your closing costs will be more, and they will be dependent on a lot of variables that are difficult to predict until you meet with a Realtor. I’ve said it before and I’ll say it again – who you work with really sets the stage, and can make or break this experience. The most important thing you can do to control your costs, is to be selective about your representation, have a clear cut agreement with expectation set, and pick someone who will provide you the most value in terms of services provided versus costs. Your agent can also provide you with net sheets to help manage your expectations for the end result of the process – your profits.
In short, if you have just begun the process of weighing out if home ownership is right for you – don’t let closing costs scare you away. There are many creative solutions to them, and while you should be prepared in the way of knowing they exist, you should not let them stand in the way of owning, or investing, in Real Estate.
If you have already begun the process and your agent has not had the closing costs conversation with you yet, you need to do that now, so you can prepare for how these costs will impact you.
Thank you for tuning in to the #AskJulieC Real Estate Show, do you have questions about your costs in the process of buying or selling a home? Reach out to me today or visit JulieCalza.com for more information on closing costs, and using or RE-using your VA Loan. Thank you again for tuning in, see you next time!