The Negotiation Process

When you have found the home that best meets your needs, you are ready to make an offer on the house. In most cases your real estate agent will present your offer to the seller. Do not be discouraged if your first offer is rejected by the seller. It is not uncommon for the seller to make a counter-offer.

Once the selling price has been agreed upon by both the buyer and seller, a purchase contract is started. In most cases, your real estate agent will help you negotiate the terms of the purchase contract. The purchase contract is a legal contract that details the final terms for the purchase of the home including price, closing date, and estimates on the closing costs. By signing the purchase contract, it means you have agreed to purchase the property under the negotiated terms and price. Although some closing cost fees are required by law, you can negotiate others as part of the purchase offer.

What’s included in closing costs?

Closing costs typically average approximately 5-10% of the house price. This percentage may vary, depending on where you live. In general, your closing costs will include the following items:

  • Lender Fee – Typically paid by the seller to cover the lender’s expenses for processing the loan.
  • Title Insurance – Based on the sale price of the home. The percentage of sale price varies by title insurance company. It is the fee charged for property title inspection and insurance policy against policy defects. This will require coverage for both the lender and the buyer’s guaranties.
  • Title Search Fee – Fee charged for examining the public record, laws, and the Registry of Deeds to ensure that no individual other than the seller can legally claim ownership of the property.
  • State Mortgage Taxes – Fee charged by the state as a tax on the sale of the home.
  • Settlement Charge – Fee charged by the closing company to cover attorney fees and other expenses incurred.
  • Escrow – Items for which the lenders require escrow accounts, as they are not monthly fees. Companies usually require two months in escrow at closing. Federal, and in some cases, state law dictate the amount of funds that must be held in your escrow account at all times. Your realtor or lender can help ascertain these amounts. Items that typically require escrow accounts include:
    • Hazard Insurance – Fee charged for insuring the property against property loss or damage.
    • Property Tax – Fee charged for the property that is based on the assessed value of the property. The tax rate can vary by county.
    • Mortgage Insurance – Fee required by lenders to insure against the risk of default by the borrowers. This is usually required if the down payment is less than 20% of the mortgage amount.
  • Settlement or Closing Fee – Fee charged to cover the services of the settlement agent that handles all the payment transfers during the closing.
  • Attorney’s Fee – Fee charged if an attorney performs the functions of a settlement agent. In some states, it is required that an attorney be involved with the closing process.
  • Flood Insurance Fee – Fee charged to determine if the property is in a Special Flood Hazard Area.
  • Home Warranty Fee – Fee charged by an insurance company for a warranty that covers repairs or replaces defective items in the home.
  • Home Inspection Fee – Fee charged for professional inspection of the house to identify any problems associated with the home.
  • Survey Fee – Fee charged for measuring the property to document location, dimensions, and any construction improvements of the property.
  • Notary Fee – Fee charged to cover cost of a licensed notary individual authorized by the state to certify the identity of the individuals signing the documents.
  • Recording Fee – Fee charged for filing closing documents such as your deed of trust at the county recorder’s office.
  • Interest – Prorated fee charged daily for mortgage interest due from the date of funding until the time of the first monthly mortgage payment.
  • Lender Fees/Charges
    • Discount Points – Finance charges calculated by the lender at closing. Each point is equal to 1% of the loan amount which is paid at closing. This fee is sometimes charged by the lender to reduce the interest rate of the mortgage, also referred to as a “buydown”. One discount point typically reduces the loan rate by an eighth of a percentage point. For example, if the interest rate is 7.5%, you may end up paying 7.25% over the life of the loan and pay the difference in additional up-front costs equivalent to 2 discount points. Discount points are based on the total loan amount and can vary by lender and by lender’s loan products.
    • Loan Origination Fee – Based on loan amount; typically this fee is 1% of the loan amount.
    • Mortgage Interest – The interest on the loan amount from the date of closing to the last day of the month.
    • Credit Report Fee – Fee charged by lender to request a credit report on the borrower. This fee varies by location and reporting agencies.
    • Appraisal Fee – Fee charged for a written evaluation of the fair market price for the property. This fee varies by lender.
    • Tax Service Fee – Fee charged by the lender to cover the cost of hiring a tax service agency. A tax service agency monitors the property tax payments for the loan and informs the lender if they are not paid in full and on time. If property taxes are included in the monthly payment as part of the escrow account, the tax service will obtain the tax bills for payment by the lender.
    • Document Preparation Fee – Fee charged to cover the cost of preparing the loan documents.

Who pays for what?

There are no definitive rules on who pays which closing costs. The buyer and the seller usually negotiate who pays certain closing costs. For instance, the seller may be willing to negotiate full or partial payment of appraisal fees, loan points, credit report request, and inspection fees. Usually the seller is responsible for the brokerage fees, as this is compensation to the real estate agents for their roles in the sale of the home.

Earnest Money – Typically required as part of the purchase contract, earnest money provides a “good faith” deposit and secures the sale agreement. This deposit is usually a portion of the purchase price. This deposit shows that the buyer is serious about purchasing the house. Earnest money is held in an escrow account for the buyer and can be applied toward the down payment or closing costs. In some cases, the buyer must pay the deposit in cash.