First-time home buyers are bound to think of the property’s actual price as the total cost associated with its purchase. When purchasing a new construction property, it is crucial to understand that the closing process is not just about signing the dotted line and handing over the keys. There are many other costs to take care of before you move in.
These costs can include your mortgage insurance premium, appraisal fee, taxes, title fees, and other miscellaneous charges collectively known as closing costs.
Let’s understand the closing costs on new construction and how it affects the purchase price of your home.
Closing costs are the fees and charges associated with real estate transactions in addition to the property’s actual price. Interestingly, both buyers and sellers are subject to closing costs, which must be disclosed by law to both parties before a real estate contract is initiated.
Examples of closing costs include fees related to the origination and underwriting of a mortgage, real estate commissions, taxes, insurance, and record filing.
Are there closing costs on new construction? Yes, indeed. Closing costs on new construction are typically higher than a standard real estate purchase. It involves additional fees, which makes it a tad higher than buying a regular home. These include warranty fees, harmonized sales tax, and development fees.
These costs can vary in different states but typically average about 3% of your total purchase price for an average house in America today.
The closing costs on new construction can also vary depending on whether you are purchasing the house from a developer or someone selling their property. Other factors affecting these costs include the location, price, number of people purchasing the property, and if any government assistance is available for first-time home buyers.
New construction closing costs are typically calculated using the purchase price, mortgage interest rate, loan term, and down payment.
Most often, builders and home buyers approximate the new construction closing costs from 1-5% of the total purchase price.
The closing costs on a new build are more than just the down payment and the monthly mortgage. There are other fees that have to be paid before the house is yours.
These charges can vary depending on your state, but most of them include:
This is a mandatory fee every homeowner pays to their county, city, or town. Property taxes are levied on the owners by local authorities to fund their area’s public services. These are usually assessed as a percentage of the value of the property.
This fee is charged when transferring ownership from the seller to the buyer in some states.
A survey covers any boundary lines or easements, ensuring they match up with what is on record with your local government office. A certified surveyor clearly defines your legal property lines depending on the size and makeup of the landscape.
Homeowner’s insurance protects your house against certain damages such as fire, hail, vandalism, etc. The policy also covers liabilities against accidents or if someone gets injured on the property.
The appraisal fee is the cost incurred for an appraiser or inspection service to visit and evaluate the property you are purchasing. It is typically paid by the borrower, not the seller.
Who pays this fee also depends on what has been agreed upon in the contract. If there is no mention of who pays for it in the contract, then it will be assumed that each party will pay their own appraisal fee or split it equally.
The fees can vary depending on where you live, but they are usually between $200 and $400 for a single-family home.
A title search is usually required to ensure that there are no liens or other encumbrances on the property. The cost for this will vary depending on where you live and the company you use to do your title search. The average cost is between $150-$350.
It is typically paid by the seller, although it may be paid by either party.
The recording fee is a charge imposed by the government for the privilege of recording documents. It registers the deed in public records, meaning it cannot be transferred or sold without the knowledge of the government. The fees vary in different states and are usually based on the size of the paper or deed.
In some states, such as California, there are additional charges for recording certain types of documents. For example, there is an additional charge for recording a document in California that is more than 20 pages long or includes more than one property.
A mortgage lender typically requires you to pay for the title insurance premium. The cost of this insurance is around 0.5% of the loan amount. Still, it can vary depending on your property and the lenders you use.
The title insurance company will provide a policy to cover any defects in the title that were not found by your lender or attorney during due diligence. This policy will also cover any claims arising from a title defect, such as an easement or lien, which would be paid from the escrow account.
A new homebuyer has to pay the interest associated with the lender’s money in the escrow account. It can be paid either with the first installment or spread across monthly installments over time. The former is called “prepaid interest.”
The prepaid interest is calculated as a percentage, and it’s usually deducted from your down payment.
There are multiple ways for a buyer to reduce their closing costs and bring the seller to the negotiating table.
Some of these include – Making them pay for title insurance, paying for property taxes, or using an escrow account.
Let’s take the example of an escrow account on file with an escrow company. In that case, it’s necessary to negotiate who will pay what portion of their fees at closing. The best way is by getting a list of all closing costs before you go ahead with signing the final contract.
In most instances, the buyer and the seller find common ground, offering both of them a shot at a fair deal.
“It depends.” The lender will need to consider the borrower’s creditworthiness and the borrower’s down payment or equity in the property.
In general, if a borrower has a good credit score and does not have much equity in the property, then yes, a loan can cover closing costs. However, if a borrower has less than perfect credit or lacks equity in the property, the loan might not cover the closing costs.
It also depends on the LTV and DTI ratios. Which essentially means Loan To Value and Debit to income ratio.
Let’s understand this with an example:
Loan Amount – $10,000,000
Value of the Property – $20,000,000
LTV = Loan Amount/Property Value
10000000/20000000*100 = 50%
This is a good LTV as the loan amount is too low compared to the value of the property.
Let’s take a look at DTI.
DTI- Total Monthly debt payments / Gross monthly income
Example- $3000 (Monthly debt payments ) / $10000 (Monthly income)
30% DTI is decent, and the lender will have no problem funding your Closing costs.
Closing costs are an integral part of a real estate transaction and must not be ignored by a new construction home buyer. You must know how to calculate the closing costs of a new home and the ideal way to negotiate a good deal.
As mentioned several times in the article, you are entitled to a fair deal. You must know the liabilities that stand with you and those bound to the seller.
Closing costs depend on your location and the type of property you are purchasing. The average closing costs for a single-family home in the US is around $3,000 to $4,000 or 2% – 5% of the purchase price.
The amount of closing cost you pay depends on the location as well.
For example, in some states, there is no requirement for notary fees or title insurance. Still, there is a requirement for real estate commissions to be paid by the seller.
You can negotiate the closing costs with your real estate agent or builder before signing a contract.
Builders typically include a certain percentage of closing costs in the price of a new home or condo, so they often leave room for negotiation. Still, you mustn’t create an adversarial relationship with your agent or builder by negotiating too aggressively.
Most often, closing costs can be included in the construction loan if they are less than 2% of the total loan amount. Other factors, such as DTI, LTV, and creditworthiness, also play an important role.
Closing costs can be high because multiple third-party service providers are involved in a transaction. Many state fees, too, factor into the total cost of buying a new home, thereby increasing the total closing costs.
In a new construction home purchase, the buyer can pay closing costs up to 3% of the purchase price. If it exceeds this, the buyer must communicate with the builder/seller and negotiate a fair deal.