Who Pays Closing Costs on New Construction?

When you’re eyeing a brand-new construction home, the pristine walls and custom finishes are likely at the forefront of your mind. But there’s a crucial financial aspect you need to consider: closing costs. Unlike the more prominent down payment, closing costs are the various fees and expenses that pop up at the end of the real estate transaction, and they can sneak up on you if you’re not prepared.

So, who foots the bill for these costs on new construction homes? Typically, as the buyer, you’re on the hook for the majority of these closing costs. They cover everything from loan origination fees to title searches and can add up to a sizeable amount. However, it’s not all on you—sometimes builders will offer to cover a portion of closing costs, especially if you’re working with their preferred lender or during certain promotional periods.

Understanding who pays what can give you an edge in negotiating and help keep your budget in check. You don’t want any surprises when you’re at the finish line, ready to walk through the door of your brand-new home. Keep this in mind as you budget for your purchase, and don’t hesitate to discuss these costs with your builder and lender to see where you might be able to cut down on expenses.

What Are Closing Costs?

When you’re in the market for a new construction home, you’ll encounter various closing costs which encompass a range of fees and charges. Understanding these will help you budget properly and avoid any surprises at the end of the home buying process.

Definition and Components

Closing costs refer to the expenses over and above the price of the property that buyers and sellers normally incur to complete a real estate transaction. These costs can include but are not limited to property tax, appraisal fees, origination fees for processing your loan, title insurance to protect against ownership disputes, and escrow fees paid to the entity managing the exchange of property.

Typical Closing Costs for Buyers

As a buyer, you can anticipate closing costs to be between 2% to 6% of the purchase price of your new home. Here’s a breakdown of what you might expect:

  • Appraisal fees: You’ll need to pay for the home to be appraised, which confirms that its value matches the selling price.
  • Origination fees: This is what your lender charges for processing the paperwork for your home loan.
  • Title insurance: This assures you have clear ownership of the property without any legal issues arising from past ownership.
  • Escrow fees: Parties outside of the transaction will manage the exchange, requiring payment for their services.

Typical Closing Costs for Sellers

Sellers also have fees to pay; although they may differ in type and amount, they typically include:

  • Property tax: Sellers must clear any owed property tax up to the point of sale.
  • Title insurance: In some cases, the seller may pay for the buyer’s title insurance as part of the negotiation.
  • Escrow fees: Similar to buyers, sellers will incur fees for the escrow services.

When you’re negotiating the sale, you’ll want to keep these fees in mind as they’ll impact your final cost.

Related: Are New Construction Homes Negotiable? Exploring Your Options

Who Pays What in New Construction

When you’re looking at a shiny new construction home, it’s important to understand that both you and the builder have specific costs to take care of during the sale. Here’s how the responsibilities break down and what you can do to potentially lower your expenses.

Buyer’s Responsibilities

As a buyer, you’re usually on the hook for most of the closing costs. These costs are varied and can include:

  • Loan origination fees: The cost for processing your mortgage application.
  • Title insurance: This protects you in case of title disputes.
  • Appraisal fee: The price for having the property’s value assessed.
  • Prepaid items: Such as homeowners insurance and property taxes.

Seller’s/Builder’s Responsibilities

The builder, on the other hand, has fewer responsibilities in terms of closing costs, typically covering:

  • Document preparation: Any costs associated with preparing sales documents.
  • Deed recording fees: The expense for recording the real estate sale with the appropriate government office.

Negotiating Closing Costs

Negotiating closing costs can work out in your favor. Here’s what you should know:

  1. Builder Incentives: Sometimes builders offer incentives where they cover a part of the closing costs if you use their preferred lender.
  2. Flat Discounts: You might negotiate for the builder to take a flat amount off the closing costs.

Builders are more likely to negotiate on these costs if it benefits them, like maintaining a relationship with their preferred lender. It’s always worth a shot to ask for concessions or incentives — the worst they can say is no.

Related: Things to Consider Before Purchasing a New Construction Home

The Role of Lenders

Lenders play a pivotal role when you’re closing on a new construction home. They can affect your closing costs significantly, through the types of mortgages available, incentives for using a preferred lender, and the loan estimates and fees they provide.

Mortgage and Loan Types

When you’re picking out a mortgage, you’ve got a plethora of loan types at your fingertips. Each with its own terms and conditions.

  • Fixed-Rate Mortgages: You lock in an interest rate for the life of the loan.
  • Adjustable-Rate Mortgages (ARMs): These offer lower initial rates that can change over time.
  • Government-Insured Loans: Options like FHA or VA loans, which might have different fee structures.

The type of mortgage you choose affects not just your monthly payment, but also the origination fees charged by the lender.

Preferred Lender Incentives

You might get nudged by your builder to go with their preferred lender. Why? Well, there might be some perks in it for you like:

  • Discount Points: Essentially pre-paid interest that reduces your mortgage rate.
  • Closing Cost Assistance: Could save you a chunk of change at closing.

Just keep a sharp eye out for strings attached. Sometimes, the incentives are tied up with higher home prices or less wiggle room for negotiation.

Loan Estimates and Fees

Alright, time to break down the fees on that Loan Estimate you’ll get:

  1. Origination Fees: Pay attention here, this is what the lender charges to make the loan.
  2. Third-party Fees: Costs for services like appraisals and title searches.
  3. Prepaid Items: These include property taxes, homeowners insurance, and interest that accrues before your first mortgage payment.

Your lender should provide a Loan Estimate, which outlines all the costs tied to your loan. It’s a clear snapshot of what you’ll need to pay before and at closing.

Related: When Do You Pay for a New Construction Home?

Financial Considerations for the Buyer

When gearing up to buy your new construction home, it’s crucial you get a handle on the potential costs you’ll be expected to cover, from your down payment to the closing costs and additional expenses that could pop up. Let’s break these down to help you plan your budget effectively.

Estimating Your Closing Costs

First up, closing costs. These are the fees you pay to finalize your mortgage and they typically range from 2% to 5% of the purchase price. Include things like the loan origination fee, title insurance, and appraisal fees here. To get specific:

  • Loan Origination Fee: This is what the lender charges for processing your mortgage. It usually lands around 1% of the loan amount.
  • Title Insurance: Protects you from any issues with the legality of your new home’s title.
  • Appraisal Fee: This confirms the home’s value for you and your lender.

Down Payment and Total Loan Amount

Now, let’s talk down payment. If you’re going conventional, aim to put down at least 5% to 20% of the home’s sales price. However, if you can’t hit the 20% mark, be prepared to pay for mortgage insurance, which protects your lender in case you default. Remember:

  • Down Payment: A larger down payment means a smaller loan amount and less spent on interest over time.
  • Mortgage Insurance: This can be a significant extra cost if your down payment is less than 20% of the home’s price.

Additional Costs and Reserves

You should also keep an eye on the cash reserves you’ll need post-closing. Lenders often like to see that you have at least a couple of months’ worth of mortgage payments stashed away. Additionally, be mindful of costs that don’t always come to mind, like HOA fees, utility hookups, and landscaping expenses. These add up, so including them in your overall budget is smart planning.

Legal and Administrative Aspects

When you’re knee-deep in buying a new construction home, the legal and administrative hoops might seem endless, but they’re crucial. Each step ensures that your purchase is legally sound and officially recorded. Below is a breakdown of what you can expect when it comes to the legal and administrative aspects of your closing costs.

Transfer Taxes and Recording Fees

Your home’s change in ownership isn’t free of charge when it comes to the government. Transfer taxes are like a sales tax for your home. The rates vary by location but they’re usually inevitable. Then, there’s recording fees—that’s the cost for making your purchase a matter of public record. These costs can add up but they’re all part of making your new home officially yours.

Title Search and Title Fees

Before you get those keys, a title search is a must. It’s how you ensure no one else can claim they own your new place. If the title’s clear, you’ll pay title fees for the peace of mind that no one’s going to pop up with a claim on your new place. Think of it as investing in a drama-free future with your new home.

New Construction Specifics

When buying a new construction home, you’ll encounter specific fees and processes not typical in a standard home purchase. Understanding these costs and procedures ensures you’re prepared for what comes your way.

Builder Deposit and Other Builder Fees

Your journey into a new construction home kicks off with a builder deposit. This upfront payment secures your intent to purchase and can be a significant chunk of change. Generally, the builder deposit is a percentage of the purchase price and may be non-refundable. Beyond the deposit, you might face other fees for customizations or upgrades to the standard model, which could be included in your closing costs or billed separately.

Managing Delays and Builder Errors

Building a home from the ground up is a complex process, and delays can happen. Make sure to review your contract for clauses about delays and how they’re handled. If builder errors occur, typically they’re responsible for the repairs. However, you should know what recourse you have if the construction doesn’t go as planned, which might involve additional negotiations or even seeking legal advice if necessary.

Home Inspection and Final Walkthrough

Even though it’s new, inspecting your construction home is non-negotiable. You’re entitled to a home inspection before closing to catch any issues. If the inspection reveals problems, you can often negotiate with the builder to make repairs.

Before you get the keys, you’ll do a final walkthrough. It’s your chance to ensure all agreed-upon improvements are completed and that the house is ready for you to call home. Keep an eagle eye on the finish work and don’t be shy about pointing out anything that’s amiss.

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I’m Nicole Mickle, a real estate agent in Orlando, Florida. I’m here to assist you in making the most out of your Florida lifestyle.

In addition, I’m the author behind¬†Florida Homes and Living, a blog dedicated to sharing valuable content about Orlando, interior design, remodeling, and the Florida lifestyle.

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