Buying Your First Home - Closing Cost Basics

Closing costs play a major factor in every home buying contract. Most first time homebuyers do not realize how significant closing costs are in a home's final price; some can go as high as 15 percent. Lenders may often require buyers to pay for these costs upfront while some lenders include closing costs into the buyer's loan. Recognizing what these costs are as early as possible will help homebuyers budget their funds and even negotiate for a lower contract price.

Lenders base their maximum loan offer amount on the sales price and not on the net price of the property, (that is sales price less closing costs). You can make a deal with your Realtor and lender to find the best way to allocate closing costs depending on your budget.

The first step in understanding closing costs is to learn what buyers are typically responsible for. Barron's 'Smart Consumer's Guide to Home Buying' explains that it's important to understand that custom - and not law - dictate how closing costs are allocated and what the buyer and seller are required to pay as part of the contract.

Buyers are responsible for paying all fees and discount points of the loan. These costs are usually added by the lender at the end of the contract and the costs may vary depending on the financial institution. Bankers sometimes waive these fees for favored customers or as part of the contract, however, you still need to estimate these costs as early as possible during the loan financing process.

Buyers are also responsible for paying the premium of the home owner's title insurance policy; in most cases, they will need to pay for this before the home purchasing process can even begin. It's generally a good idea to have extra cash available to pay for this premium so it doesn't get rolled into the loan, and the premium cost varies by the insurance company you choose to work with. It helps to shop around, so do some research about homeowner's insurance policy rates and options before signing any contract.

Sellers usually assume the following costs. Sales Commissions - both the seller's and the buyer's agents are entitled to sales commissions based on a percentage of the final price. The percentage may vary depending on the agreed rates with the buyer's and seller's real estate agents.

Inspection Costs - the costs of termite inspections and other testing required for the home before the purchase can be completed are assumed by the seller.

Insurance of the Title - Title insurance costs are normally listed as part of closing costs and are the responsibility of the seller. New homebuyers commonly make the mistake of assuming that they are responsible for paying any obligations with the title company.

Understanding the breakdown of closing costs can give you a more accurate overview of what the final price will be at signing. Some lenders can provide you with an estimate well before the closing date and many are willing to explain all of the fees, discount points and other items applicable to your loan early in the loan financing process.

Are you a new homebuyer looking for homes for sale in Minnesota? Searching online using the Minnesota MLS is an excellent way to find the kind of property you're looking for.