Buying a new home is an exciting prospect, but it can also be expensive.
After all, you’re taking on a mortgage and incurring fees for various things during home-buying. You’ll have closing costs for the title, for example, as well as other fees.
While you can’t do much about your mortgage (short of paying off your mortgage early), you can reduce the costs you’ll incur. In this article, we’ll give you some tips on how to avoid closing costs when buying a home.
Understand the Closing Costs
The first step to avoid or reduce closing costs is to know the exact amount associated with each real estate deal. Closing costs combine transfer taxes, title, origination, and attorney fees. Knowing the expenses beforehand will give you an idea of what to expect when you close the deal and what you would need to pay out of pocket.
It is important to begin researching these fees before even looking at properties. For example, when buying or selling your land, the most common closing cost is the broker’s fee, title search fee, legal fees, and document fees. There may also be additional, including recording fees and transfer taxes.
Importance of Homeowner Tax Benefits
Homeowners can use certain credits, deductions, and exemptions to offset closing costs. To take advantage of these benefits, you must be aware of them. Examples include the following:
Mortgage Interest Deduction
They usually calculate the Mortgage Interest Deduction (MID) of interest charged on a loan to buy a primary house. MID enables homeowners to lessen their taxable income up to a certain amount.
You may qualify more if they itemize your deductions instead of taking the standard deduction.
Property Tax Deduction
Homeowners who itemize deductions on their tax returns may be able to deduct closing costs, certain taxes paid on their mortgage or home purchase, and their year-end property tax bill.
These deductions help minimize the cost of home ownership by reducing your taxable income.
Income Tax Return Credit
Depending on your income and the taxes paid, you may qualify for a credit on your income tax return. They base available credits on disbursements made to the home, such as points or loan origination charges.
Additionally, you can claim exemption on transfer/recording fees and other miscellaneous costs related to buying or selling a home. Before closing on your home, research homeowner tax benefits available to you, as this may save on closing costs.
Seek Out Loan Programs
A great option is to seek out loan programs that offer aid with closing costs. For example, the Federal Housing Administration provides loan programs.
They allow borrowers to roll closing costs into the loan amount. As a result, it reduces or eliminates out-of-pocket expenses.
Veterans benefits offer loan assistance as grant money, sometimes up to 5% of the purchase price. Some regions also offer Specialty Grant Programs.
The key to avoiding closing costs is researching the loan and grant options. Doing this will help determine which fits your financial situation best. Knowing the available financial assistance can make or break a deal if the buyer has limited funds.
Explore Different Payment Methods
Negotiate an all-cash deal with the seller, as all cash offers don’t include closing costs. Use seller financing, which involves the buyer making payments directly to the seller instead of a third party, as it lowers the need for unnecessary expenses.
Utilize an assumable loan term, which allows the buyer to assume the loan terms of the seller and assume their interest rate, which limits the fees.
Another payment plan is a home equity loan or line of credit. You can use the loan proceeds to pay closing costs, eliminating the need for cash.
Finally, a wrap-around mortgage is a payment plan allowing a buyer to pay the seller instead of the lender. It eliminates the need for closing costs.
Research Different Property Types
Research different types of properties available in the area. For example, consider land contract homes, sponsored homes, short-sale properties, and foreclosures. These types of properties may not incur typical closing costs due to the unconventional nature of the sale.
Look into government programs that help finance or buy a home without these fees. Areas with urban renewal or redevelopment initiatives will likely have many such programs.
Search for properties with sellers willing to pay the closing costs. Homeowners or investors looking to make a quick sale may be more likely to reimburse them for making the sale.
Consider Trade-Ins or Leases
With a trade-in, you “swap” one property for another, thus avoiding most closing costs. On the other hand, leasing allows you to rent the property from the seller, with the option of buying it later. So, you do not need a mortgage and will not incur these expenses.
Although you will have to make monthly payments to the seller for the rental of the property, it can be a great way to get into a property without paying any upfront costs. First, however, remember your needs and goals for the property.
You must also factor in whether trade-ins or leases are available for the property of interest. If so, review the terms and conditions. Ultimately, the choice is up to the buyer to consider and decide which option is best for them.
Negotiate for Freebies From the Seller
Freebies can make up the difference between the sale and closing costs. In addition, you can negotiate for freebies from the seller, such as the following:
- upgrades to the property
- closing cost assistance
To help make the deal appealing to the seller, you should make your offer high enough to cover both the purchase price and the freebies since the seller wants to keep their home private. But if the freebie is expensive, you could opt for the seller to pay some closing costs instead to keep the selling price low.
Consider the value of the freebie and do your research to verify that the freebie is worth that amount. Negotiating for freebies can take some extra time, but the result is worth it.
Utilize the HUD Good Neighbor Program
The HUD Good Neighbor Program (GNNP) allows qualifying individuals to buy foreclosed homes at a discounted rate. The procedure is through the Department of Housing and Urban Development.
The discount rate is estimated to be as much as 50% of the property’s market value. To qualify, you must be a police officer, teacher, firefighter or EMT, or a full-time worker in the local community.
You must be willing to live in the property for at least two years and make repairs to the home that meet HUD’s standards. Moreover, you must also have a good credit score and enough funds to cover closing costs and down payment. It can reduce the costs incurred when buying real estate if eligible and approved.
Take Advantage of Title Company Services
Before finalizing a home sale, many use title companies to research and clear any title importance and verify the deeds on the property. Title companies offer specific services and promotional packages that can lower or even cut closing costs. Some of these services include:
- title checks
- title insurance
- document preparation
- document distribution
Title companies can also help in other transaction aspects, such as home inspections and appraisals. Also, they can handle the closing process, which prevents the buyer from paying closing costs to an outside entity.
Furthermore, title companies are usually cost-effective, as their services are at a lower price than if you use an attorney, bank, or real estate broker.
Work With a Real Estate Agent
Working with an experienced real estate agent can be a helpful tool in achieving this. Before signing on with an agent, ask about potential discounts or fee reimbursements. A professional agent may be willing to discount their commission or other fees to remain competitive.
Once you have chosen an agent, communicate your financial goals upfront. For example, explain that you would like to buy with minimal closing costs and inquire if they would be willing to break down specific fees. The more informed your agent is, the better they can tell you about reaching your goal of minimizing closing costs.
They may suggest different strategies, such as paying from the seller’s proceeds or adjusting the selling price. Additionally, an experienced agent can tell you the best financing sources to get a lower interest rate or use creative tactics such as a “subject to” clause.
Learn How to Avoid Closing Costs Today
Real estate is a sought-after asset, and understanding how to avoid closing costs is vital to optimizing profitability. Even if you can’t prevent or lessen them altogether, having a firm understanding of the fees involved will prevent you from being taken advantage of.
Negotiate closing costs or even have the seller cover them. It will reward you with an excellent purchase without breaking the bank. A little effort at the beginning can save you a lot of money in the long run!