Q: I just finished the process of applying for a home loan with a well-known local mortgage brokerage. I was told that the only loan I could qualify for with my credit, income and $10,000 for a down payment was a house purchase price of $310,000, with a 3.5 percent FHA loan.
I was blown away to see that the broker listed an additional 4 percent in closing costs, which was almost $11,000 by itself, so that the total cash I’d need to put down to close on a house would be approximately $22,000.
What are normal closing costs, based on an approximate loan amount of $300,000? I feel like I’m getting scammed; should I compare lenders? This is so complicated!
A: It’s true — in all the talk of down payment and homebuyer education, closing costs get too little ink, given their size and power to make or break any buyer’s deal. Here’s what you need to know.
1. The fees you’ve been quoted are not bizarre or red flag-waving. I don’t have a copy of your good faith estimate, but I can tell you that the closing costs you’ve been quoted do seem right in the normal range for your area.
First off, Federal Housing Administration loans have higher-than-normal closing costs, ranging around 3-4 percent on average (including meaty fees for private mortgage insurance, which are often rolled into the overall mortgage, just so that you don’t have to pay them upfront). At lower purchase price amounts than yours, it’s not bizarre for closing costs to run as high as 5 or even 6 percent; at higher price points, they can be a bit lower.
Additionally, you should be aware that there are numerous line items included in closing costs that have nothing to do with your loan, and that render the closing cost quote you have a tentative estimate only (though most mortgage brokers usually estimate on the high side).
For example, at closing you’ll have to pay prepaid interest on your mortgage from the date of closing through the end of that month — if you close early in the month, that prepaid interest amount will run higher than if you close near the end of the month.
As well, the city of Oakland, Calif., will charge a hefty transfer tax of $14 per thousand dollars of the purchase price, which is customarily split 50/50 between buyer and seller. That tax, by itself, is more than $4,000 on a $310,000 purchase price, so would represent at least $2,000 of the $11,000 you’ve been quoted.
2. Strategies exist that might bring your closing costs down. Talk with your mortgage broker about whether there are any first-time-buyer or low- to moderate-income homebuyer programs offered in your city, county or state that might help defray some of your closing costs or otherwise help you stretch the cash you currently have saved for your down payment.
Also, talk with your real estate broker or agent about the prospect of getting your eventual home’s seller to pay your closing costs. FHA guidelines allow sellers to give buyers up to a 6 percent closing cost credit at the time of sale. Of course, whether you can negotiate such a deal is highly situation-specific. The individual selling the property you want to buy has to sign off. One way to boost your chances of finding such a situation is to look at homes listed slightly below the price range you would otherwise prioritize. Your agent can give you more insight on whether this is common on your local market.
Finally, ask your mortgage broker (and get a second opinion on) whether, with 5 percent down, you might actually be able to get a conventional (non-FHA) loan with lower closing costs. If you’ll have to come up with more than 6 percent to get an FHA loan, you might be able to find a non-FHA loan with lower closing costs and negotiate, say, a 1 or 2 percent seller closing cost credit and make the transaction happen with an overall lower amount of cash to close.
3. It’s never a bad idea to get a second opinion. While I can vouch that the closing costs you’ve quoted are not at all in the "scam" realm of things, based on the facts you’ve provided, feeling like you’re getting scammed is not a good way to start off the relationship with your mortgage broker-to-be. It’s essential that you not feel this way throughout your transaction.
Did your mortgage broker walk you through these fees or provide you with links or other documentation to help explain these fees? If not, you might consider talking with one or two other mortgage brokers, in any event, to find one who is willing to sit with you, explain and document such issues until you feel comfortable.
In fact, my favorite mortgage broker is often willing to sit down and go over another broker’s good faith estimate and explain it and any differentials between hers and the other broker’s — I’ve seen her do this multiple times, never criticizing the other broker’s estimate or calling him a fraud. That said, because of her extreme commitment to educating borrowers until they are completely clear, I’ve seen a number of them switch to her despite the fact that she said they were getting as good a deal from the other guy as she could offer them.
Consider doing this: Get referrals from friends, relatives and your agent to the mortgage brokers they love. Ask each broker to give you a good faith estimate, and then ask them to go over theirs and another broker’s with you. In the process, you’ll certainly find a broker who has the tone, style and trustworthiness you’re looking for.
Tara-Nicholle Nelson is a real estate broker, attorney and the author of two critically acclaimed books on real estate. Tara also speaks and writes on the art and science of life transformation at RETHINK7.com.
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