Today, many builders offer incentives to the buyer in the form of either upgrades to the house or credits given at settlement that help reduce the closing costs. Often, in order to qualify for these offers, the builder may require that you use its in-house or affiliated closing agent. It may also offer assistance with financing, help arrange pre-qualification for a mortgage and even secure reduced interest rates and loan-related costs. There is no problem with using the builder’s recommended or affiliated agents, but there are certain things you can do to insure that you will get the best deal possible — and pay the lowest fees.
These days, closing costs on a new house typically range from 2 to 4 percent of the sales price. A house that sells for $250,000, for example, could incur settlement fees from $5,000 to $10,000. Naturally included in those fees will be the costs associated with obtaining a mortgage and expenses payable to the closing agent (or title company) such as:
• Title searches and lien clearance
• Issuance of title insurance
• Payment of applicable county and state transfer taxes
• Recording fees
Although many builders might insist that it is customary for the buyer to pay all title insurance fees — depending on who issues the policy — this fee can be negotiated. When you use the builder’s in-house or affiliated agent, the builder is generally allowed greater leeway to offer you a discount or credit toward the settlement costs.
Whether you use the builder’s agent or a closing company of your choosing, be sure to ask for a “reissue” rate for the title policy. A reissue rate is available to a home buyer when the seller has owned the property for a stipulated amount of time — generally two to 10 years. Each state sets its own requirement as to the length of time the seller must have owned the house and also determines the reissue rate.
In Florida, for example, the seller must have owned the house for less than three years to qualify for the discount, whereas in Maryland the seller can own the property for 10 years or less for the buyer to be entitled to the reduced rate. According to Federal Title and Escrow Company in the District, 65 percent of all transactions qualify for the reissue rate, and in some in some cases, the discount can be as high as 40 percent.
In new construction, the builder will have already purchased title insurance on the land, probably within the last year. So the buyer would qualify for a discounted rate that would be applied to the amount paid for the policy on the land, and then pay the standard rate for the balance. For example, if the builder purchased a title policy for $200,000 and the sales price of the new house is $400,000, the buyer would receive a discounted rate on the first $200,000 of coverage, and only pay the full cost on the remaining $200,000 balance.
On all home sales there is a state-levied transfer or “documentary transfer tax,” and in some areas individual counties add their own transfer tax. The tax rate is determined by the state (and counties), and who will pay the tax is determined by local custom. You can find a chart of the tax for your state at: www.ncsl.org/research/fiscal-policy/real-estate-transfer-taxes.aspx.
In some states, such as California, the seller always pays the tax. But in other states, such as Maryland, the fee is shared between the buyer and seller and an exemption is given to first-time home buyers. Although the tax is not negotiable, who pays the tax can be. This is especially the case if you are using the builder’s agent, as the builder will be able to negotiate with you regarding who will pay this closing cost. An independent title company may not have that option. Similarly, if you use the builder’s finance company or preferred lender, you may be able to receive further discounts (ones that might not otherwise be available to you), on loan fees.
To be sure you are getting the best value on closing costs, check with a local title company, and ask if it will run a comparison for you between your builder’s closing cost estimate and the title company’s breakdown of fees. Many companies will do this for you at no charge, and it generally takes only minutes. You may find that the builder’s estimates for title and escrow fees are much lower, and choose to take that option.
To avoid any misunderstandings, complete your closing cost negotiations with the builder before you sign the sales agreement.
Sandy Gadow, a freelance writer and author of “The Complete Guide to Your Real Estate Closing,” is a former title officer and licensed real estate agent with more than 20 years of experience. Gadow will answer readers’ questions in future columns. Contact her at email@example.com.
Previously from Sandy Gadow: