Closing costs are on the rise (thanks mostly to taxes), so how can first-time buyers on a tight budget make sure they will have enough cash on hand before they sign a contract? Find out here what programs and data are available to help.
The biggest mistake first-time buyers make, according to Barbara Corcoran, is one she made herself — failing to plan for closing costs.
“When I bought my first home I showed up at the table to close without the closing costs. Thank God I was able to borrow it from the very nice seller or I couldn’t have closed on the place,” she recently told CNBC.
If Corcoran were buying a home today, she might find that closing costs are rising so fast that the “very nice seller” might think twice about forking over the cash.
Taxes and prices
Taxes are a leading cause of rising closing costs. In the July 2018 report, ClosingCorp, a company that provides automated closing costs, estimated that taxes accounted for $2,213 (40 percent) of the national average cost.
Rising prices are driving up the size of mortgages, which in turn is increasing closing costs. “For houses under a million dollars, prices for services are relatively elastic. Settlement, title, and recording fees, as well as transfer taxes, change with the loan amount,” Gerardo Caceres, senior vice president of data operations and product management at ClosingCorp, said.
To some degree, rising home prices also account for some of the 16 percent increase over the past nine months. If price increases flatten out next year as forecasted, Caceres believes closing costs will follow suit. “You will see a vendor-driven competitive environment, and that usually leads to more efficient pricing,” he said.
‘Know before you owe’
The rule of thumb is closing costs are 2 to 5 percent of the price of the home, or somewhere between $5,158 and $12,895 for today’s median home price, according to the National Association of Realtors’ (NAR’s) October 2018 existing homes report. Under the Consumer Financial Protection Bureau’s (CFPB’s) “Know before you owe” program, also known as TRID, lenders must provide borrowers a loan estimate that includes all closing cost estimates and final cash totals needed to close.
Unfortunately, buyers can’t apply for a mortgage and get a loan estimate until they know the estimated value of the home, its address and the amount of the loan. Buyers usually don’t apply for financing until they have signed a contract and made a deposit.
So how can first-time buyers on a tight budget make sure they will have enough cash on hand before they sign a contract?
Unlike almost every other area of real estate, hard data on closing costs is hard to find online. The best source is ClosingCorp which went into business more than a decade ago to empower consumers, then switched to a B-to-B strategy in time to become a premier source of data for lenders seeking information on closing service vendors well before Know Before You Owe launched.
ClosingCorp’s data is based on real rates and fees as reported by its 20,000 plus real estate service providers throughout the country, which include lender’s title, owner’s title, settlement, appraisal, recording fees, transfer taxes and more. Some 20 to 25 percent of closing vendors are now in its database. ClosingCorp is available by subscription to lenders.
“We are focused on working with many mortgage technology providers to incorporate our technology at the point of sale, so that the consumer can see the cost of the loan and the differences between providers,” Caceres said. In 2009, ClosingCorp won Inman’s Innovator Award for Most Innovative New Technology.
Last October and again this July, ClosingCorp issued its first report summarizing current costs for closing services by state as well as national averages. Beginning in 2019, ClosingCorp plans to issue reports twice a year, that will include state averages for each service category.
In the nine months between October 2017 and July 2018, ClosingCorp’s national average closing cost leaped from $4,876 to $5,651. To some extent, the increase resulted from transfer taxes and local recording fee updates, as well as the addition of new vendors to ClosingCorp’s expanded network. “The change in average costs is due not just to appreciation, but also the vendors who do business with us,” said Caceres. “That is working well because, for example, you can see the difference a change in down payment might make.”