Are closing costs negotiable?

If you’re considering buying your first home, you may have been surprised to discover the costs of buying a house involve more than the home sale price. You likely also need to make a down payment and pay to get the home inspected and appraised. Even if you already own a home and want to refinance, taking out a new loan to replace your existing mortgage also comes with closing costs.

Once you’ve taken care of those upfront costs and are ready to close on the sale of your home, you must factor in your closing costs. At this point, you may be wondering: Are closing costs negotiable when refinancing or buying a home?

The short answer is yes. Whether you’re buying a home or refinancing your mortgage, you may be able to negotiate closing costs. A home buyer can negotiate with a seller and have them cover a portion of these fees. A homeowner can negotiate refinancing closing costs with their lender.

What are closing costs?

Closing costs are the fees you pay your lender and third parties to process a real estate transaction, such as buying a home or refinancing a mortgage. These costs can include origination fees, appraisal fees, title searches and taxes.

In a home buying scenario, you pay closing costs after the seller transfers the property title to you. The total amount you owe in closing costs will depend on a variety of factors, including the home’s sale price. Closing costs typically average 3% – 6% of the total loan amount. If you took out a $100,000 mortgage, you could expect to pay between $3,000 – $6,000 for closing costs.

However, sometimes you can negotiate closing costs. While you can ask a seller to cover some of it, it’s still usually a pretty big chunk of change. If your total closing costs are higher than you expected, you don’t need to settle for paying that amount. Work with your lender, real estate agent and seller to explore your options, such as bringing your closing costs down by comparing fees and other charges.

What mortgage closing cost fees are negotiable?

Negotiating closing costs can save you a lot of money, but not every cost is negotiable. So, before approaching your lender, learn which fees are negotiable and which aren’t.

For instance, borrowers have a lot of room to negotiate the fees lenders charge but won’t have as much room to negotiate the fees charged by the government or third-party providers.

Here are some fees buyers can likely negotiate down or compromise on with a seller or lender:

• Homeowners insurance: You must purchase homeowners insurance when you buy a home. It protects your lender’s financial stake in the property if it’s damaged or destroyed in a fire or natural disaster. Buyers can shop around and compare rates from different insurance providers to get the best deal possible.
• Discount points: Discount points are an upfront fee you pay at closing for a lower interest rate on your mortgage. One point equals 1% of the total loan amount. So, you’d pay $1,000 for a $100,000 home. If you want to save money upfront, apply for a lender credit. It reduces what you pay upfront in exchange for a slightly higher interest rate.
• Origination fees: The origination fee covers the costs of underwriting the loan. The fee usually costs about 1% of the total loan amount. You can always ask your lender to lower or waive these fees.
• Underwriting fees: Some lenders charge an underwriting fee to evaluate your loan instead of an origination fee or in addition to it. However, it’s another fee your lender may be willing to negotiate.
• Loan application fees: The loan application fee is a one-time fee your lender charges for processing and underwriting a loan. You should negotiate this fee, especially if your lender has charged several other fees.
• Real estate commissions: Closing costs will include the commissions of the buyer’s and the seller’s agent. The seller typically pays both agents’ fees from the sale proceeds.
• Title insurance: A title search is necessary to help ensure the home you’re buying has a clean title. You’ll need to purchase a lender’s title insurance policy, which protects your lender if someone tries to claim they have a right to the property. While lenders aren’t obligated to choose your preferred title company, you can request that they choose a more affordable company.

Which mortgage closing costs are nonnegotiable?

While you have some room to negotiate closing costs, some fees aren’t negotiable. Here’s an overview of the nonnegotiable fees:

• Appraisal fee: An appraisal fee covers the cost of a professional appraiser evaluating your home to determine its fair market value. The appraisal fee is a necessary cost. In most cases, the buyer pays for it. However, even if it’s nonnegotiable, a buyer can shop around for the best appraisal fee.
• Credit check fees: Before you can buy a home, your lender will run a credit check to determine your creditworthiness. This information helps your lender determine the rate and repayment terms for your mortgage. Some lenders will cover this fee.
• Government fees: You may have to pay government-based fees during the home buying process, which can include a title transfer fee or a recording fee. There’s no room to negotiate on government fees.
• Courier fees: Courier fees cover the cost of transferring your loan documents to different parties. While these fees are nonnegotiable, they’re relatively inexpensive.
• Property taxes: You’ll pay some money upfront for property taxes at closing. The exact amount you pay will vary depending on the home’s location.

How to lower your closing costs

when you’re making a large purchase, it’s in your best interest to negotiate the best deal possible. Chances are your lender won’t voluntarily offer to charge fewer fees, and the seller won’t freely offer to step in and help pay some of your closing costs – you have to make that happen.

Let’s look at the steps you can take to negotiate your closing costs and save some money.

Be prepared

It’s important to walk into the negotiation process prepared. Otherwise, you’re giving away your leverage, and you may overlook certain items your lender was willing to negotiate.

Start by figuring out your proposed closing costs and which fees may be negotiable. From there, you can approach your lender.

Work with your lender

Within 3 days of submitting your mortgage application, your lender must send you a Loan Estimate. The form breaks down what you’ll pay to take out the mortgage. Go through this form line by line to know which fees you’re responsible for paying.

Once you know the fees your lender is charging, you can begin the negotiation process. If your lender is charging multiple fees, ask them to knock a few off the final price tag.

Compare the lender’s proposed rates and fees with the offers you received from other lenders to make apples-to-apples comparisons. Ask your lender which fees they would consider reducing or waiving. They probably won’t wipe out all fees but will likely compromise on a few.

Ask the seller

Another option is to work with the seller and ask them to contribute to your closing costs. For instance, you could ask the seller to pay specific fees, like the title transfer fee. When a seller agrees to contribute toward your closing costs, that’s called a seller concession. Seller concessions can be a powerful way to save on negotiable closing costs.

The odds of success with this tactic will rely heavily on the real estate market you’re buying in. It can be more challenging to convince the seller to contribute to closing costs in a competitive housing market. Asking for seller concessions in a market where sellers are juggling multiple offers may jeopardize the chances of a seller accepting your purchase offer.

Roll your closing costs into your mortgage

If you don’t want to pay closing costs upfront, another option is to choose a no-closing-cost mortgage. Your lender will pay off your closing costs, and in exchange, you agree to a slightly higher interest rate.

Depending on your situation, not having to come up with the money upfront can be a financial lifeline that gets you into a home sooner.

While you won’t pay closing costs upfront, you’re not getting out of paying them. Your lender will roll the costs into your loan, leading to larger monthly mortgage payments over the loan term.

Carefully consider whether saving money upfront makes the most sense for your finances. You may pay more money over time because what you pay in interest is often higher than your initial savings.

Try to close at the end of the month

Another way to lower your closing costs is by closing at the end of the month. When you do this, you pay less in prepaid interest, effectively lowering your closing costs.

Research Home Buyer Assistance Programs

If your savings are low and you need help paying closing costs, look into home buyer assistance programs. You won’t have to pay back any money if you qualify for a grant to cover your closing costs. Many cities have down payment and closing cost assistance programs for qualified home buyers, which is especially helpful for first-time home buyers.

You usually must meet a program's income limits, credit score and property requirements to qualify. Some programs require borrowers to take a home buyer education course. Research the homeownership assistance programs in your state and ask your real estate agent or lender if they can recommend programs you may qualify for.

When is the right time to negotiate closing costs?

Timing is one of the most important aspects of any negotiation. You need to know when’s the right time to ask for what you want and when you’re better off waiting.

Sometimes, you can take advantage of seller concessions and have the seller cover some closing costs. However, buyers may struggle to get a seller to agree to seller concessions in a competitive market. If you know a seller is juggling multiple offers, consider holding off on negotiating closing costs. In a seller’s market, the seller likely has little incentive to contribute to your closing costs.

If the seller doesn’t agree to contribute toward your closing costs during the negotiation phase, you may need to consider backing out of the house offer. If not, you should anticipate paying more money in closing costs.

The bottom line: Negotiable closing costs can save you money

While you can negotiate closing costs and save money, your ability to negotiate will depend on the real estate market and how much leverage you have.

It’s best to make sure you’re financially prepared to pay closing costs before buying a home. You’ll have peace of mind knowing you can cover the costs, and any money you save will be icing on the cake.

If you’re interested in making an offer on your dream home, get started on your mortgage application with Rocket Mortgage^®. Our Home Loan Experts can help you learn more about the home buying process and answer all your questions.