GECU Voices brings you thought leadership and insight from experts within the Credit Union.
A down payment isn’t the only thing homebuyers need to budget for. Closing costs are another necessary line item that must be paid upfront before you can cross the threshold of your new home. We sat down with Brandon Wheatley, one of GECU’s dedicated Mortgage Loan Originators, to get answers to all of your questions about closing costs – including strategies to lower them!
Q: What are closing costs and what do they include?
Brandon: Closing costs are the fees or charges due at the closing of a real estate transaction. Typically, they are going to run you around 1% of your total loan amount. For example, on a $300,000 loan amount your closing costs would be roughly $3,000. That breakdown is the following:
- The underwriting fee or processing fee – nearly every lender will charge one.
- The appraisal fee – lenders often use a third party to do your appraisal.
- Title costs – [GECU] uses a third-party title company that will do an exam, a binder, and a full title search. Title insurance is also required to protect the lender in case there's any liens or defects that we didn't catch prior to.
These three components make up the majority of your closing costs when you're buying a new home. You'll have some additional costs like a recording fee; which, depending on what county you're in, could run anywhere from $150-$200.
And then you can also purchase optional title insurance for yourself, which is called the owner’s policy. This optional title insurance will be disclosed to you as a cost, but it is again optional. It’s not required, but it does protect you as the homebuyer. It will cover legal fees or court costs if someone claims the property belongs to them on the grounds of a fraudulent deed or unknown heirs, protect homeowners from clerical mistakes, and more.
Q: What are prepaids?
Brandon: After the 2008 housing crisis, the government decided it would be beneficial for them to lump all these costs together. When you receive the closing disclosures (CD) or loan estimates (LE) from your lender, you're going to see a much higher number than your loan officer may have told you.
When we internally refer to closing costs, we’re referring to your title work, appraisal, underwriting, and processing fee; however, what you also have to take into account is what’s called your prepaids. Whether you’re going to escrow your property taxes and insurance or not, a lender always requires one full year of your homeowner’s insurance paid upfront. This is referred to as your prepaids.
So, if your homeowner’s policy is $1,200, you'll have to pay that $1,200 at closing, in other words, you’ll have to “prepay” that ahead of time. If you choose to have an escrow account – an account where the lender pays your property taxes and insurance on your behalf – you'll make a monthly payment, included in your mortgage payment. In the state of Ohio, your property taxes will be paid twice a year and your homeowner’s insurance will be paid annually.
On the disclosure form, the CD and LE, a lender will lump these prepaids and closing costs into one section. So let's say for example on a $300,000 loan amount you're expecting to see $3,000 in closing costs, you might see $5,500 instead. The first thought in your mind may be, “Oh my gosh, my lender told me this and now it's this!” What they did on the form is lump those costs together. That section now includes your title work, your appraisal, your underwriting fee, and all your prepaids.
Q: How can you negotiate closing costs down?
Brandon: In a normal market, which I think we're coming close to again, you can negotiate for the seller to pay up to a certain percent of your actual closing costs. Now that percentage will vary based on the type of property and whether it's a Federal Housing Administration (FHA), conventional, or a Veterans Association (VA) loan. Traditional conventional loans allow the seller to pay up to 3% of closing costs. The FHA and VA allow the seller to pay up to 6% of closing costs.
Another way to lower closing costs is by financing your home purchase through GECU. Our $750 low closing cost mortgage option reduces the amount of money you need to have on the day of your closing.1
Q: What are the benefits of a home loan with GECU?
Brandon: When you research financing for a home, you want a lender that’s been doing this for a while and who has enough expertise to walk you through the basics. Whether you're a first-time home buyer or this is your fourth or fifth home, you're looking at rates, costs, and efficiency. In today's marketplace, with closings being so competitive, a lot of agents want to do a 30-day close or less. We make sure we're able to hit those closing dates.
Also, many people still want to go into a branch if they have a question about an escrow account or a payment. They would much rather talk to a live person instead of calling an 800 number that winds up somewhere else. And with our local branches, they have immediate access to someone who can help them.
Lastly, we keep our loans in house. We won't sell them, so our members don't have to set up new payments with another, non-local lender down the road. That means no matter how much time has passed, you’ll still make your payment to GECU.
If you’re ready to start your homebuying journey and are interested in our $750 low closing cost mortgage option,1 Brandon Wheatley or another member of our mortgage loan team can go over the details and help you determine if it’s the right option for you! Contact us online or schedule an in-branch appointment to get in touch with a dedicated team member.