Answering Common Borrower Questions: “What are Closing Costs?”

These expenses are all-important, but often misunderstood.

As a mortgage professional, you are no doubt well-versed in all aspects of the homebuying process. That includes closing costs. Your clients, on the other hand? Not so much.

 Not only are consumers fairly confused about the homebuying process as a whole, but more than half of buyers are surprised by closing costs, specifically!

 That means there’s ample opportunity for meaningful financial education. When closing costs do come up, you can bring clear communication, relatable analogies, visual aids, and straightforward language to the table. Better yet, you can send clients home with online resources or hands-on tools to help drive the message home. Then, your clients can show up to closing informed, empowered, and truly ready to sign on the dotted line.

 So, let’s dive into some of the most common borrower questions surrounding closing costs and their comprehensive answers:

“What are Closing Costs?”

Far too many buyers are wholly unprepared for closing costs. Don’t let your clients become them! It’s your job to explain, clarify, and guide potential borrowers through the entire process, and that includes closing costs.

 Start with a clear, simple explanation of closing costs. A sample script might be:

 “Closing costs are the final expenses needed to complete a real estate transaction. They’re all the things you typically pay for beyond just the home’s purchase price.”

 It might also help to cover what is typically included in closing costs. You can share a cursory list with them, which might look something like this:

• Application fee
• Credit report fee
• Homeowners insurance
• Mortgage points
• Origination fee
• Property taxes
• Title insurance
• Underwriting fee

 Walk through the list together, diving into each bullet point. You’ll want to tailor your approach to their unique situation and market when appropriate, but a solid foundational knowledge of these expenses will be critical in building financial knowledge and moving forward in the process.

“Who is Responsible for Paying Closing Costs?”

This is a great question, and one anxious clients are almost sure to raise when considering these potentially unexpected expenses.

 Explain that they will be typically responsible for most closing costs. But don’t forget to share the fact that the seller may cover some, as well.

 The amount and expectations vary from state to state so, if necessary, brush up on your market’s stance. Then, share that information with the client.

 At the end of the day, closing costs are unavoidable. However, helping clients understand their roles and responsibilities can ease some of the stress and help set realistic expectations.

“How Much Will I Pay in Closing Costs?”

Naturally, this will probably be the client’s next question. As a general rule of thumb, closing costs typically range between 2-6% of the loan amount. Explain that the answer will depend on a few different factors:

• Loan amount
• Transaction type (purchase or refinance)
• Property location

 For a hands-on experience, sit down with the client and pull up a closing costs calculator. Run some numbers together, illustrating how the costs can change with a less expensive home or a larger down payment.

“Can I Roll Closing Costs into My Home Loan?”

Some clients may not want to pay closing costs out of pocket. But is paying interest worth it?

 Explain to clients that rolling closing costs into their loan may be possible but be sure to cover all the pros and cons. Running some numbers may be helpful here. Put pen to paper and illustrate just how much it would cost if they were to pay interest on the initial amount.

“Can I Lower My Closing Costs?”

Once they are ready to dive in, walk through the approval process together. Remember that borrower education means more involved and empowered clients, so take some time to explain each step in depth.

 A few options might include:

• Choosing a less expensive home. A lower purchase price typically equals lower closing costs!
• Shopping around for other professionals (home inspectors, surveyors, settlement agents, etc.). These services make up a significant chunk of overall closing costs and can often be cut down a bit.
• Asking the seller for help. It’s no guarantee but explain that some sellers may be willing to chip in on some expenses.
• Negotiating or asking for discounts. The worst they can say is “no,” right?

Closing Costs: What Clients Need to Know

Closing costs can be intimidating, discouraging, and even outright scary. But a solid foundation of knowledge can help. By explaining and clarifying these concepts and costs, mortgage professionals like yourself are actively empowering clients. Thanks to you, they’ll be better equipped to make informed decisions best aligned with their financial goals.

 So, go ahead and give yourself a pat on the back! You’ve earned it.

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