When you’re buying a home and forking over the dollar bills by the tens of thousands, don’t forget about the nickels, dimes and pennies. You might have prepared for the big expense-like a down payment-but the “little” costs can add up to a lot of dough and a big cash-flow problem.
There are the lender’s costs, the attorney’s costs, the moving costs and the insurance costs.
But just as cost-conscious consumers comparison-shop for groceries or clothing, home buyers can hunt for the best prices on all of the ancillary expenses involved in the purchase process.
That process begins during the negotiations-before you even sign a contract on a home. You just might be able to get the seller to help you with some of those costs.
“When you’re buying a home, you can negotiate almost anything,” notes Mark Elias, a real estate broker in the Buffalo Grove office of Martin & Marbry.
“I have seen the seller give back cash at closing for a decorating allowance,” says Beth Llewellyn, board liaison for the Illinois Association of Realtors in Springfield. “The buyer anticipates that he won’t have enough cash once he purchases the home, but he knows he needs money for new carpeting or other improvements once he moves in.”
Let the seller pay
Sometimes you can get the seller to pay the lion’s share of your loan costs.
Robert Rosenberg, vice president of Midland Financial Mortgage, a Schaumburg mortgage brokerage firm, says, “Sellers can even pay a buyer’s closing costs-everything but the `pre-paids.’ ” Rosenberg explains that “pre-paids” involve the mortgage interest, tax escrow and homeowner’s insurance that lenders typically require at closing. “When you close on a loan, you usually don’t have to send in your first mortgage payment until a month after you move in,” explains Rosenberg. “The `pre-paids’ cover the interest and tax portion owed from the time you move in until you start paying those sums on your regular mortgage.”
Some lenders may frown on a seller pitching in to pick up all of the closing costs. “We let the seller pay points up to certain limits,” says Kent Evanson, vice president of First Chicago Mortgage Services, Oakbrook Terrace. And lenders typically like to see all of the down payment coming from the buyer, not the seller, because the ability to come up with a down payment relates to a borrower’s creditworthiness, says Llewellyn. “Lenders will look more favorably at a seller helping with closing costs than they will at a seller helping with a down payment,” she notes.
Whether or not a seller will agree to pitch in cash for any purpose to clinch the sale depends on how skillful the buyer is in negotiating and how motivated the seller is to sell. Notes Llewellyn: “It’s amazing what makes a buyer want to buy and what a seller will sell for.”
Evanson suggests that buyers who want to put some punch in their bargaining power first become “pre-approved” for a loan. Not to be confused with “pre-qualifying,” pre-approval means that the buyer has already paid an application fee to a lender and has been given a definite commitment to obtain a certain amount of mortgage within a specified period.
“With pre-approval, a buyer can make a `cash’ offer,” notes Evanson. “Sellers will take a cash offer much more seriously than an offer with a mortgage contingency. The buyer then has more power to bargain.”
Loan expenses
But before buyers seek pre-approval-which involves paying an application fee of around $300-they should first shop to determine which lender to apply with. “The most significant way that buyers can save is to check out the various fees that lenders charge,” counsels Lake Zurich real estate attorney Neil Anderson.
Lenders are all going to charge fees for an application, appraisal, credit report and title costs, and require tax and insurance escrows. These costs may vary somewhat, says Anderson, but lenders can also throw in “junk fees” that can add up-sometimes up to several hundred dollars.
Rosenberg says buyers should ask for a “good faith estimate of settlement service charges” before they plunk down an application fee. “By law, lenders have to supply buyers with this information within three business days of the time they apply,” says Rosenberg. “But service-oriented lenders should be happy to supply this information to buyers before they apply,” says Rosenberg.
With the estimate of service charges in hand, buyers can compare the fees of various lenders. “Different lenders use different terms for the fees,” says Gerald Haase, vice president of Central Federal Savings and Loan of Chicago. “Look for terms such as `document preparation fee,’ `tax service fee,’ `underwriting fee’ or `commitment fee.’ “
While most lenders include some type of “junk fee,” some lenders include far more than others.
First-time home buyer Sunil Thakkar called about 15 lenders for a list of their fees and found a big difference in costs. “I asked each lender if the application fee included the appraisal and credit report,” recalls Thakkar. “Some lenders advertise no application fee but then charge for these items, while other lenders include it as part of the application fee. I also made a list of miscellaneous fees, such as `document processing’ or `tax preparation,’ asking lenders if they had any charges under those headings.”
It took effort to make the calls and comparisons, but Thakkar says he saved about $1,000 in possible fees. “I started early,” he says. Thakkar advises other home buyers to do the same. If you wait until you find a home, you can find yourself too rushed to comparison-shop.
“Buyers can’t just look at the rate and points,” Anderson emphasizes. “I’ve seen zero-point loans that carry $200 document preparation fees, a $200 underwriting fee and a $75 tax service fee. Buyers have to decide if they would be better off paying fees or looking for a loan with no costs.”
Indeed, in recent months, more lenders have been adopting “no point” and “no cost” mortgages. These loans can help buyers conserve cash because, just as the names imply, points and/or fees are eliminated. With a no-point loan, buyers don’t pay a hefty upfront charge to the lender that can amount to as much as 3 percent of the loan amount (each “point” equals 1 percent of the laon amount). With a “no cost” loan, buyers still typically pay an application fee of around $300, however. As a general rule, “no point” loans are offered at one-quarter of a percentage rate higher than loans with points, and “no cost” loans are about one-half a percentage point higher. So, instead of paying upfront, the buyer is paying the costs over the life of the mortgage.
A buyer short of cash can take this option. “On a $100,000 loan,” notes Rosenberg, “a half of a percentage more in rate means that you’ll pay about $40 more a month.”
Insurance fees
In addition to lender’s fees, buyers must pay a portion of their real estate taxes on their new home at the time of closing as well as the premium for the first year’s homeowner’s insurance coverage. While there’s not much buyers can do about their tax bill, they can take steps to minimize the bill for homeowner’s insurance.
Rosenberg says that homeowner policy premiums average about $300 annually. But if buyers increase the amount of their deductible, says Dean Moffitt of the Alliance of American Insurers, a Schaumburg-based trade group, they can reduce that amount. “Most people carry a deductible of about $500,” says Moffitt. Another way to save: “Decide exactly what kind of coverage you want, and don’t buy coverage that is unnecessary.”
Home buyers who make less than a 20 percent down payment usually must also pay for another type of insurance-private mortgage insurance, known as PMI. The lender needs insurance when a buyer makes a low down payment, because statistics show that low down payments correlate with a higher incidence of default.
Typically, says Rosenberg, buyers who make a 10 percent down payment pay about 0.4 percent of the loan amount at closing for PMI. “The lender usually selects the PMI company,” he says, “but many of the companies have just begun to offer special programs whereby the buyer doesn’t have to pay anything upfront, but spreads that cost over the monthly payments.”
Because these no-payment-upfront PMI programs are new, some lenders may not offer them, says Rosenberg. Borrowers need to ask lenders if this option is available.
Paying the attorney
Home buying involves an amazing amount of paperwork, money transfers and signing of binding documents. Most people like to have a lawyer overseeing the process. “It is against the law for a real estate broker to advise you,” says Kathy Kory, a real estate attorney with the Chicago law firm of Sonnenschein, Nath & Rosenthal. “Most people hire an attorney because you are signing documents that bind you to certain obligations.”
Hiring a lawyer is likely to cost about $350 to $400, says Anderson. “I’ve seen fees as low as $295 and I have seen fees as high as $1,000,” says Anderson. “I would raise an eyebrow if fees were significantly over the average.”
Some lawyers charge hourly rates, but many real estate attorneys do the job for a flat fee, says Anderson. In Chicago, he says, costs are likely to be a little higher. Chicago attorney Kory agrees: “Fees range from $500 to $1,000.” Both Anderson and Kory say that some attorneys specialize in real estate closings, and offer lower rates.
Naperville home buyer Dan Gallo says he regrets not shopping for a low-cost attorney. “I would advise people to shop for someone with the best rate,” says Gallo. “Most of the home-buying transactions are pretty standard and you don’t need high-priced advice.”
Gallo recently moved just down the block from his previous home. He thought moving costs would be minimal, because he and his wife could simply pack themselves, and even pick up many items unpacked and cart them down the street on moving day.
“Even in a local move,” he learned, “you should get plenty of estimates and pack everything well, or you are going to have chaos and extra expense.”
Moving companies should be willing to come to your home and give a free estimate, says Kim Stratton of Midwest Movers in Glenview. “We also tell people to check a company’s credentials with the Illinois Commerce Commission or the Better Business Bureau.”
While home buying is expensive, buyers can take some comfort in the fact that many of the costs are tax-deductible.
“You can always deduct the points paid, as long as you have paid for them in cash, and have not built them into your mortgage,” notes Cary Buxbaum, an accountant with the Skokie firm of Frost, Ruttenberg & Rothblatt, P.C. And once buyers start paying on their mortgage, the interest portion is tax-deductible.
Buyers who want to start enjoying some of the tax savings before they file their next return should consider visiting an accountant and running a projection of their likely savings, says Buxbaum. Then, asking your employer to increase the number of exemptions will yield a fatter paycheck and more cash in hand for the home buying process.
