First Time Homebuyer’s Guide to Saving Money at the Settlement Table

Every spring the articles start popping up everywhere, “The five most important things you need to know about buying or selling a house.” As someone who started out twenty-five years ago selling real estate and has now been in the title industry for more than twenty years, I find that the information in the majority of these articles is not very informative and frankly, a waste of your time.

So many of these articles and blog posts give out easy information that falls into the category of common sense or simple enough to determine on your own.  You don’t need help answering fluffy questions like what kind of neighborhood do you want, or what’s the difference between an adjustable rate mortgage and a fixed rate mortgage?  Nobody seems to want to educate you about the process or give you enough insight for fear that you’ll start to ask questions that really matter like:

“Which monthly expenses affect the amount of money that I’ll be able to borrow?”
“Do I need a buyer’s agent and who pays them?”
“Are closing costs negotiable?”
“Who picks the settlement/title company and what do they do?”

The three primary players who will assist you with the purchase of your new home are your lender, your real estate agent/broker and your settlement company.  So it stands to reason that these are the three places to start asking questions in an effort to find potential savings on your home buying expenses.  As the buyer you get to choose who you work with and you can save yourself time, money and headaches by having a general understanding of the process before getting caught up in the emotion of finding the perfect house.

Let’s start with the lender. Everyone is looking for the lowest interest rate, but what will that rate ultimately cost you? Over the years the mortgage industry has become more and more competitive, to the point where most lenders quote rates within 1?8 to ¼ point of each other. If you’re paying $1,200 in additional fees to lower your mortgage payment by $7 per month, it might not be worth it. Conversely, if you’re short on cash you may be able to negotiate a slightly higher interest rate and receive a credit from the lender that covers your lender fees, title insurance and recording fees, reducing out-of-pocket expenses by a few thousand dollars. For the most part, application fees, processing fees and loan origination fees are all negotiable, but these fees vary from lender to lender.

When it comes to your real estate agent/broker, understand how the process and its related fees work. Typically the real estate professional that represents you as the buyer is paid a commission that actually is paid by the seller. However, if you’re being represented under the terms of a “buyer broker agreement,” under certain circumstances you could be responsible to pay all or part of the commission to your agent out of your pocket. Those situations are the exception rather than the rule, but it’s still important to know what you’re agreeing to before you sign a buyer broker agreement. In today’s market, especially on some larger transactions, we’ve seen the buyer’s agent credit a portion of their commission to be applied toward their client’s closing costs. It’s not common place in our market, but we’re seeing it more and more.

There are some fees that are negotiable with your real estate agent/broker.  Many real estate companies charge a broker’s services fee or flat fee commission to the buyer. We’ve seen this fee range anywhere from $150 to $700 depending upon the real estate agent/company. This is basically an administrative fee to process the transaction and this fee is negotiable as well. Our view has been that a modest administration fee may be appropriate, but if you hire a good settlement company they will perform the majority of the same administrative tasks at no additional fee, as this service is already included in the cost of your title insurance. If you’re using your real estate agent/broker’s in-house title and/or mortgage company, don’t even consider paying this additional fee. In addition to the commission, the profits they earn from their in-house mortgage/title business should be sufficient.

Understanding the role of your settlement company will also help you save on your closing costs and title insurance fees. The settlement company is paid out of the one-time premium that you pay for title insurance. In both PA & NJ, the buyer has the right to choose their own settlement company. The title insurance premium, lender endorsements and lender closing services letter are not negotiable, but there are hundreds of dollars in miscellaneous title fees that are. Some companies will even cover all or part of the county recording fees. When you factor in the savings that you might realize by hiring your own settlement company and have them process all of the paperwork on your behalf, the total savings could reach $500 to $700 easily.

Educating yourself as to the home buying process requires more than knowing your credit score, researching school districts and knowing how much homes are selling for in a certain neighborhood. It’s also about the little things that may not seem all that significant, but can cost you thousands of dollars in unnecessary fees.

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