In real estate, closing costs are one of the most confusing and misunderstood parts of the home buying process. Too many homebuyers jump feet first into the process without budgeting for these costs and fees. This is a mistake, as these fees can add between two to five-percent of the home’s entire purchase price (sometimes even more). The good news is that you may or may not have to pay them.

In some cases, you can ask the home’s seller to cover some or all of your closing costs. Keep in mind that every real estate transaction is different, and so much largely depends on the market in the area, the type of financing you’re using, the specific property, and of course, it’s owner. If you are looking to pay less out of pocket, here are a few things you need to know about getting a seller to pay your closing costs.

Loan Type Restrictions

Before you write an offer on a home, talk with your real estate agent and your loan officer about how best to tackle closing costs given your unique situation. FHA, USDA, VA and conventional mortgages allow sellers to contribute toward your closing costs, but there are different caps and rules with each.

When it comes to closing costs for FHA and USDA loans, sellers can contribute up to six-percent of the sale price toward closing costs, prepaid expenses, discount points and more…know that you can’t put this money toward a down payment.

VA loans allow the seller to pay all of the buyer’s mortgage-related closing costs and up to four-percent of the purchase price in concessions, which can cover things like prepaid taxes and insurance and even paying off collections, judgments or leases at closing.

Conventional loans are slightly more restrictive. Buyers with an LTV ratio above ninety-percent can ask a seller to pay a small percentage of the purchase price. If the LTV ratio is between seventy five to ninety-percent, sellers can pay up to six-percent.

Asking Too Much?

Asking the sellers to pay your closing costs may seem like a no-lose situation. But some markets and buying situations may be better suited to this than others. You should always talk to your real estate agent to be sure you understand the market you’re in and the current buying and selling conditions. Asking sellers to pay your closing costs in a hotter real estate market may lead to your offer losing traction. If the seller is dealing with multiple offers, asking for help with closing costs could push your offer to the bottom, or eliminate you from the running altogether.

Sellers will often agree to pay a closing cost credit if they get everything they want. Sellers want qualified buyers who will close escrow and not cause any problems during the escrow period. In other words, offer to buy the home in its as-is condition and assure the seller the buyer will take care of any home inspection issues after closing.

What If They Say No?

If the sellers aren’t keen on the idea of paying your closing costs, or if asking might jeopardize your offer, you have a few options to consider. One is to use verified gift funds from family or friends. This needs to be paper-trailed and a true gift with no expectation of repayment. Rules for how you can use gift funds can vary by lender and loan type. You’ll usually need to furnish a letter detailing the gift amount, the relationship and other key information.

You can also ask your lender to pay your closing costs. To make that happen, you’ll typically have to take a higher interest rate, which costs you more over the life of the loan. That may not be a big deal if you’re planning to stay in the home for just a few years. But that higher rate means you’ll pay those closing costs many times over if you’re staying in the home for the long haul (barring a refinance, of course).

There’s also the question of your overall finances if you’re not in a position to cover your closing costs. If these present a struggle, how’s that first mortgage payment going to feel? In the end, you’ll need to weigh the potential costs and benefits of asking your seller to pay your closing costs. Take a realistic look at your budget and finances, too. Talk with your real estate agent and lender to determine the best option for you.

If you’re buying a home, your mortgage down payment isn’t the only check you’ll be writing on the day you close your loan. Just about every first-time buyer has heard of the term closing costs, and have a general idea of what it means. However, while buyers do know about this standard cost, they usually are surprised when they learn about the details of expenses. So, what exactly are closing costs?

Put simply, closing costs are expenses over and above the price of the property in a real estate transaction. Closing costs occur when the title of property is transferred from the seller to the buyer, and may be paid by either party. The total dollar amount of closing costs depends on where the property is being sold and the value of the property being transferred. Homebuyers typically pay between two to five-percent of the purchase price. The most common closing cost is the down payment. Average closing costs can climb from $4,000-$10,000 which is a lot of money when you consider this is paid upfront at closing. In addition to making your down payment, there are other costs and fees associated with your home purchase.

Closing costs include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed-recording fees and credit report charges. Prepaid costs are recurring, such as property taxes and homeowners’ insurance, and the lender states these costs in a good faith estimate, within 3 days of the mortgage loan application.

Origination fees are also charged by the lender for the creation of a loan. Usually, they amount to one-percent of the mortgage. The buyer can purchase discount points up front to reduce the interest rate charged by the bank. Although the bank requires a credit report and loan application, these fees are generally negotiable and can be covered by the lending institution. Private mortgage insurance is an additional fee applied to any purchase with a down payment less than twenty-percent.

Title insurance protects the lender from claims against the house, and protects the buyer from past contractors making claims against the property. Lenders often require an appraisal; the fees differ by state, and usually run a few hundred dollars. Local governments charge recording fees and taxes to record the sale of property. Like appraisals, transfer taxes vary depending on location.

When it comes to closing costs, always remember that you actually can reduce the amount you pay at closing by requesting the seller to cover specific closing fees. One way is to offer the full purchase price on the home with the stipulation that the seller pays the costs associated with closing. Most sellers expect homebuyers to offer less than the listing price on their home. A seller will be much more open to negotiate when facing an offer of the full asking price. Another option is to meet the seller halfway, dividing the closing costs between both parties.

Some fees you can expect to pay are:

• A loan origination fee, which lenders charge for processing the paperwork for your loan.
• A fee for running your credit report.
• A fee for the underwriter, who assesses your credit worthiness.
• A fee for the appraisal of the home you hope to own to make sure its value matches the size of the loan you want.
• A fee for the home inspection, which checks the home for potential problems from cracks in the foundation to a leaky roof.
• A fee for a title search to unearth any liens on the property that could interfere with your ownership of it.
• A survey fee if it’s a single-family home or town house.
• Taxes on the money you’ve borrowed for your home loan.

Also, if you are refinancing, you may be able to cut the appraisal fee if your home has been appraised recently. If this is the case, ask your lender for an appraisal waiver. You can also save on your title insurance by asking for a cheaper rate when you refinance. If you’re getting down on all the fees you’ll have to pay, don’t forget that sellers aren’t off the hook. Like you, they have to pay closing costs too. Sellers are responsible for:

• A closing fee, paid to the title company or attorney’s office where everyone meets to close on the home.
• Taxes on the home sale.
• A fee for an attorney, if the home seller has one.
• A fee for transferring the title to the new owner.

Before you close, make sure to review all documents to see if the numbers line up to what you were originally quoted. Errors happen frequently, and you’ll be glad to have piece of mind knowing that you reduced them as much as you could, and didn’t pay extra due to any contract mistakes.

Even if you haven’t purchased a house, you’ve likely come across the term closing costs. Given that these costs can add up to 5% onto the home’s purchase price, your goal is likely to pay the least amount of them that you have to. When you’re negotiating the sale, your lender is going to give you a loan estimate, or a good faith estimate (GFE). These two terms are used interchangeably. The issue with the fees listed on this estate is that they can be difficult to comprehend. Below are small descriptions of the fees so that you understand what you’re being asked to pay.

Underwriting fees: These fees are the money charged by your lender for the administrative costs associated with creating and processing the mortgage.
Application fee: This fee is the charge associated with reviewing your mortgage loan application.
Credit report fee: This fee is the one that covers the cost of pulling and reviewing your credit report.
Point charge: This fee refers to the amount of money that you may pay for points in order to reduce your interest rate (Tip: always find the lowest interest rate you can. Be sure to shop around).
Title search: This fee covers the cost for the title insurance company to perform a search on the title of the home.
Lender’s title insurance: The cost to insure the title for the lender.
Pest inspection: This is the cost for the home inspection. It lest the lender know that the house has no major pest-related defects.
Home appraisal: This is the cost for the appraiser chosen by the lender to assess the value of the home.
Survey: The assessment of a property that discloses boundary lines, gas lines, roads, walls, easements, and improvements on the property.
Attorney, closing and settlement fees: These fees are legal fees that include the attorneys’ reviewing of documents and agreements, plus escrow fees.
Government recording fee: The fee paid to the government to officially record the change of ownership for the home.
Transfer taxes: This is a government charge based on the amount of the mortgage and the purchase price.
Mortgage insurance Premium: If your down payment is less than twenty-percent and you have an FHA Loan, you will have to pay the mortgage insurance premium.

Escrow property taxes: These are the advance property tax payments that the lender requires, to be held in escrow.
Prepaid daily interest charges: the amount of pro-rated interest that will accrue on the mortgage between the settlement date and the beginning of the first full month of your mortgage.
Mortgage insurance: if you don’t have an FHA loan and your down payment is less than twenty-percent, you will owe what’s called private mortgage insurance.
Prepaid homeowner’s insurance: This is the advance homeowner’s insurance payments that the lender requires before closing.
Rate lock fee: This fee locks in the rate the lender offers you.

Now that you’ve got an understanding of what fees actually go into closing costs, you can see that there are ways to potentially lower this amount. Below are some tips for helping you cut down the amount you’ll owe on closing costs.

Be Sure to Compare Costs
At this point, it’s no secret that closing costs are expensive. Due to this fact, you should do your homework so that you avoid paying more than you have to. This starts with shopping around lenders. Don’t go with the first one you meet with. Find a lender that offers the lowest closing costs; some will actually even match the closing costs from another lender you met with, as they’ll want your business. There are some services included in the closing costs that you are allowed to shop around for. In other words, you don’t have to go with the provider your lender suggests and you can try to find a lower price elsewhere. The closing cost services you can shop for will be listed as such on your loan estimate.

Thoroughly Evaluate the Loan Estimate
Be sure that you aren’t simply skimming the document. You should read each word carefully. Ask questions. Ask what specifically something covers, and why it costs so much. This is a way that you can avoid paying any unnecessary fees that are sometimes hidden in documents. You also are checking for any mistakes, such as accidentally being charged twice.

Be Sure to Negotiate With the Lender
There is room for negotiation in almost anything in life. You never know if you can get a better deal on something until you ask. Try to get any fees you can either excluded, or reduced depending on the nature of the fee. Ask the lender to give you the closing disclosure as soon as they are able to. This form lists a complete detail of each and every closing cost. Again, be sure to check for any mistakes. The lender isn’t as likely to check for mistakes as thoroughly as you would, as they’re not the ones that will end up paying extra due to an accidental charge. At worst, their boss will simply tell them not to do it again.

Ask the Owner if You Can Negotiate the Costs
You should know that some sellers are willing to lower the purchase price of the home in an attempt to get you to buy the house. Most sellers know that closing costs are very expensive, and they will more than likely lower them if it will help you buy the house. This is why it is so important to check the market to see whether or not you have leverage. If no house has sold in their neighborhood in 10 years, they’re going to be more willing to work with you to make the sale.

Remember You Can Always Delay the Closing
Above, we discussed how pre-paid daily insurance charges occur. You can lower those charges by paying the closing at the end of the month. Check the calendar, and plan the closing around the time that you’ll have to pay less. Remember the pre-paid daily insurance charges from the list above? You can minimize those charges by closing at the end of the month. Plan ahead and try to schedule your closing when it means you’ll have to pay less money upfront.

Unfortunately if you want to purchase a home, you can’t avoid closing costs. But do keep this article in mind before you pay more money than you have to for them.