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How home buyers can save on closing costs

(ran HH edition)

Although the home resale market is very good in most communities, that doesn't mean home buyers are at a disadvantage. Smart buyers, with help from their real estate agents, understand they can negotiate on the home's price and terms, as well as the closing costs, which are typically 5 to 10 percent of the sales price.

Whether you are buying or selling a home, closing costs are a major expense. However, be prepared to negotiate. Closing costs are not chiseled in stone. Some expenses are easier to negotiate away than others but it's worth a try (unless you want to buy a home in a hot seller's market, such as Las Vegas or California's Silicon Valley near San Jose).

For example, a few years ago when I was starting out in real estate I was short of cash. I offered to buy an apartment building substantially below its asking price. In addition, although the local custom is the buyer pays for title insurance, I specified in my offer the seller would pay for my title insurance. The seller accepted. As a result, I saved about $2,000 in title insurance fees. You can do the same.

Don't ask. Just include the terms you want in your written purchase offer. The worst that can happen is the seller says "no." But he or she might say "yes." Here are some common closing costs to consider negotiating:

(1) Mortgage loan fees. Most home buyers pay mortgage loan fees of 1 or 2 percent of the loan amount. However, you can avoid this expense by including in your written purchase offer a clause such as, "Seller to pay buyer's non-recurring closing costs up to $5,000."

This credit will more than repay your mortgage loan fee. Especially if the home has been for sale several months, the seller will often readily agree to such a credit (which is really a price reduction). However, a credit is better than a price reduction because mortgage lenders base their loan amount on the home's sale price.

A less desirable alternative is to take a so-called "no cost" mortgage where the loan fee and other up-front costs are included in your slightly higher interest rate. The disadvantage is you pay the higher interest rate over the life of the mortgage.

(2) Title insurance. Local custom usually determines whether the buyer or seller pays for title insurance. If the local custom is not in your favor, just specify the seller is to buy your title insurance. Most home sellers won't lose a sale over the title insurance cost, usually less than $1,000.

(3) Transfer fees and taxes. A significant closing cost in many cities and counties are the local transfer fees and taxes. The seller is usually responsible for paying these costs to be able to deliver clear, marketable title. However, some jurisdictions charge home buyers mortgage recording fees and other creative taxes.

Since these fees can be expensive, in many areas it is customary for the buyer and seller to equally split these charges. However, since everything is negotiable, it won't hurt to specify in your purchase offer that the seller is to pay the transfer fees and taxes.

(4) Attorney and escrow charges. Local custom usually determines whether the closing will be handled by an attorney, bank, S&L, escrow or title firm, or at the realty broker's office. Be sure your purchase offer specifies who pays for what.

Don't hesitate to shop around. For example, in areas where the buyer and seller usually hire an attorney, some attorneys charge a flat fee per home sale. Other lawyers charge an hourly rate. Some even charge by the sales price of the property.

(5) Recording fees. The home buyer usually pays the recording fees which are often modest. However, before making your purchase offer, ask your realty agent. For example, some jurisdictions have very high mortgage recording fees. If you are short of cash, in your purchase offer ask the seller to pay your recording fees.

(6) One-year home warranty policy fee. Most real estate agents encourage their home sellers to include a one-year home warranty policy. Be sure your purchase offer specifies the seller (or realty agent) will pay for such a policy, usually costing about $350. It will pay for repairs to the home plumbing, wiring, furnace and built-in appliances within a year after the sale. For an additional premium, the roof, air conditioning and swimming pool can usually be included.

(7) Mortgage interest, property taxes and insurance. Home sellers cannot be expected to pay these expenses, so home buyers should be prepared to pay these closing costs. However, by closing the home sale on the last business day of the month (except Monday, then close on the prior Friday), buyers can substantially cut their prepaid mortgage interest expense.

(8) Expect unexpected closing costs. No matter how carefully home buyers plan, there will be unexpected closing costs. To avoid surprises, several days before the scheduled closing buyers should request a written copy of the proposed closing settlement statement. Any unexpected costs can then either be corrected or funds obtained to pay them.

Summary. Home buyers who know how to handle their closing costs can save thousands of dollars by negotiating for the seller to pay. However, when you arrive at the closing table be sure to bring a cashier's check because your MasterCard, Visa, American Express or personal check will not be not welcome.

Robert J. Bruss is a nationally syndicated columnist on real estate. Write to him in care of the Tribune Media Syndicate, c/o the Times, 435 N Michigan Ave., Suite 400, Chicago, IL 60611.