Closing Costs v. Cash To Close

So, I was on the phone with a nice couple who are going to be first time homebuyers in 2020 yesterday. They’re excited to get into a home of their own, and I’m looking forward to helping them get there. 

They were sharing with me that they are going to be buying a single family home in the $200,000 price range and have the required 3.5% down payment saved ($7000) for an FHA loan plus in their words “a few extra dollars”. Well turns out that few extra dollars is about $1000. That may not be enough to get the job done!

Part of my job is to explain these things to folks, however, this one is complicated. They were told by another lender they did a prequalification with that their “closing costs” would be $995. So, they assumed they were all set. $7000 in down payment and $995 in closing (we even have $5 left over!). But there is more to it than that. When I explained it in detail, I believe we have won a new client, even though we had to deliver the news that they will need a little more cash to make this happen.

It’s my experience that home buyers want three things when they are asking for numbers. First, they want the truth. It all starts with full disclosure. Second, they want to know they are getting a fair deal. They want to be sure they are not getting ripped off. Finally, they want a real answer to “how much CASH will I need at the closing”?

The problem, for both consumers and for us as lenders is that people don’t take the time to explore the whole story. Lenders want to look “affordable” so they announce what their fee is to the consumer. “Hey, we charge $895, $995, a flat fee of $1500”. Figures vary, but lazy and worried salespeople often look to quote this figure as low as possible to win the business. Choosing to explain more later, after the client has committed to them. By the time consumers realize they don’t like where this is going, it feels too late to switch to another lender.

There is an inherent conflict that is going on here. Home buyers, aware they are spending a lot of money and have a lot of data coming at them under deadline pressure, default to “cheaper is better” and will look to negotiate this on occasion or just go with whomever seems “reasonably priced”. Then they get surprised when they get to closing and there is another $3-$5K in title fees, an appraisal, lawyer fees, transfer taxes or stamps etc. This can easily be $5000 in “surprises”. Some lenders are OK with this because they have “won” the transaction and will earn a commission. Even though it’s not very likely they will earn repeat business, or referrals from this borrower. 

Getting a detailed explanation of BOTH numbers will solve this issue! The question for consumers is “what are your fees and how does that tie into what I have to bring to closing?” The key to build a business for the long run as a mortgage lender is a detailed, longer consultation with a consumer up front so that they can understand the true cost to close and where it comes from. If done right, a consumer should never hold a lender responsible for being the messenger about title fees, transfer stamps and the other costs associated with buying.

The other thing that a full discussion will do is help the borrower, lender and Realtor plan the purchase more affordably. If you have the down payment, like my new clients do for example, but not the closing costs, you can explore a few options. Here are three. First, you can get a credit from the seller toward closing costs. It’s best to do the math on this upfront and put it into your original offer. Second you can get a lender credit in exchange for a slightly higher interest rate/monthly payment. For example, you could get perhaps $2000 toward your costs in exchange for a payment that might be $45 per month higher. Finally, you could delay the purchase a bit and save a few more bucks.

Regardless of the options chosen, understanding the two different figures, “closing costs” v. cash to close is critical to getting through the home purchase process with a minimum of stress and anxiety for the home buyer/borrower, lender and real estate professional alike.