Hello, Everyone; this is Charles McShan with Century 21 Universal from Chicago, Ill.
I trust everyone had a perfect summer; we are now in September 2024. Please look at the above photo. Owning a home costs hundreds and thousands of dollars. The title of this blog post is” Home closing costs. Why are they, and who pays what? Some may say, ‘Closing costs, what are closing costs? Who pays closing costs?” The subject of closing costs came up the other day. Most home buyers know to save up a down payment when purchasing a home.
Unfortunately, some homebuyers do not realize that closing costs are the final steps before giving them the keys to their new home. The closing fees in Illinois are expensive, and you, the homebuyer, must have the financial resources to cover these fees at the closing table. This fact is significant, considering the new rules that affect the housing market.
These new rules require home buyers to sign an exclusive buyer’s agency agreement before seeing the inside of any home’s interior nationwide. Most home sellers will continue the time-honored tradition of helping a homebuyer through closing costs and other possible concessions. The new rules now allow homesellers to say upfront they will not cover the home buyer’s closing costs or compensation to their buying agent if they do not choose to. With that being the case, homebuyers must prepare to cover 100% of their closing costs.
That is the new reality of the recently settled lawsuit verdict against the National Association of Realtors (NAR). If you are unaware of this recently settled lawsuit, you can read up on the cause of the lawsuit and the changes it brought to the industry by going to my website, charlesmcshan.com. I wrote a lengthy three-part blog post on this subject. Click this link, visit my website, and look for posts dealing with the NAR verdict. Click here
This new housing industry law may put a lot of home buyers in a financial bind because most homebuyers use every drop of money they have come up with a down payment on the home of their choice. If push comes to a shove and the homebuyer has to compensate their buyer’s agent out of pocket, most home buyers will not have the extra money for their portion of their closing costs. This blog post will discuss what is covered in the closing costs in Illinois. What portions of the closing costs will be covered by the home seller and the home buyer, respectfully? Lastly, how can closing costs still be included in the real estate sales contract? If you are ready, Let’s get into it.
Article Guide
What Exactly Are Closing Costs?
Good question. Closing costs are fees and expenses associated with purchasing a home that both the home seller and buyer will incur. Illinois’s average closing cost is 11.98% of the home’s final sale price. These include realtor’s fees, buyer and seller costs, lawyer fees, and other costs associated with a home’s sale. A home buyer must ensure they have put aside extra money to cover these costs.
Are Closing Costs the Same Nationwide?
Another good question. These fees and expenses can cost thousands and vary according to your local area. So the answer is no. Fees are not the same nationwide. They are based on your locality. In the Chicago area, there is one price, and you can go into a nearby suburb or county, and the prices will be different. Since I am based in Chicago, I will cover only the closing costs of Chicago, the county of Cook, and the state of Illinois. If you live outside Chicago, please consult your local city and county website or government agency. The same rule applies to those living outside the state of Illinois. Every potential home buyer needs to know this information upfront, so here we go.
What Fees Must The Home Buyer Pay?
Most home buyers will take out a loan mortgage to purchase their home. You go through the steps of finding the home you qualify for, sign a contract, and, hopefully, use a home inspector’s services to ensure the home is structurally sound. The home inspector’s fee is upfront and must be paid before the inspector enters the property. All homes will have problems or things that must be repaired. You, the home buyer, can fix those minor problems over time. The primary purpose of the home inspector is to find major or structural defects that can affect you and your family’s safety from day one. You do not want a considerable repair bill along with your mortgage payments. We will say this home passes the inspection process for argument’s sake. You, the home buyer, say I love this home. You have cleared the 5-day attorney review and have instructed your lender to proceed with the loan. The lender now sends the loan application to the underwriter for processing, and that underwriting process begins to generate fees.
Since this illustration is based on a Chicago home loan, we will say the home is being sold for around $300.000. This is a sample price with sample numbers, so do not hold me accountable for these numbers. At closing, your Title company will inform you what your exact cost will be down to the last penny. For this illustration, using the sample home price of $300.000, your closing costs could range from $6,000 to $15,000. Home buyers in Illinois are mainly responsible for their loan origination fees. Below are expenses associated with the loan process.
A: Loan origination Fee
This fee is what lenders charge the home buyer to cover the cost of processing a loan application and funding a home loan. The fee ranges between 0,5% to 1.5%. This variance is because the exact percentage can vary by lender and loan type; thus, the cost could run from $150.00 to $300.00.You may be able to negotiate with the seller or lender to have them cover some or all of the origination fee. These fees are disclosed in your loan estimate and generally cannot increase at closing except under certain circumstances.
Warning! You must ensure that this fee is deducted from the loan because it will reduce your loan balance if left on the loan. If you are tight on money at the closing table, this deduction might kill your deal at the last second. Please pay this amount out of your pocket. On the other hand, if you have excellent credit, you can qualify for loans that do not charge this origination fee.
The moral of this story? Do your research. Don’t just apply for the first loan you are eligible for. Also, beware of all the scams seeking to prey on you. Some scammers claim you will be approved for a loan if you pay an up-front fee when you hear this lie. Walk away or hang up the phone quickly. Once again, the homebuyer is mainly responsible for paying this bill, but in the past, the home seller could offset that cost. In today’s seller’s market environment, that may no longer be an option. So make sure you are prepared to cover this cost upfront.
B: Appraisal costs
What are appraisal costs, and why are they important to the homebuyer? An appraisal report provides an unbiased estimate of the property value that the homebuyer is trying to purchase from the lender. This impartial report will allow the lender to determine the property’s value and help the lender to approve the mortgage. These fees range from as low as $300.00 to over $1.000 depending on the property size, condition, location, and mortgage type. The appraisal process will determine that the home was appraised correctly, and the loan underwriting process will proceed. This process could result in 3 determinations.
1: The appraisal process could hit the nail dead on the head, and your future home’s value will appraise out to the cost of the mortgage loan.
2:The home’s value could be higher than stated, meaning you, the homebuyer, might have more equity upfront, which will be good.
3 The home could appraise for less than the purchase price. If that happens, the lender may not approve the entire mortgage amount. The options for the home buyer will then be as follows:
1: Put more money down to cover the difference,
2: Negotiate with the seller to lower the selling price,
3: Appeal the appraisal.
4: If the home seller refuses to cooperate with you, you have only one option: Cancel the contract. Pay close attention; if you cancel the contract, beware of the consequences.
If you cancel the contract, you will lose your earnest money. I repeat you will lose your earnest money. Yes, times are tight, and money is hard to come by. The only way to protect your money is to have an appraisal contingency clause written into your real estate contract that allows you, the home buyer, to back out of the deal if the property’s appraised value is lower than the purchase price and the home seller is unwilling to compromise. You can lose your earnest money in many ways, and my job is to inform you of this. If you are detail-oriented and wish to be completely informed on the appraisal process, I included an article highlighting the fine points for a home buyer and some advice for home sellers. Please click this link >>.click here
C: Title Insurance Fee
Both the lender’s title insurance (to protect the lender) and the owner’s title insurance (to protect the buyer) may be required and are typically paid by the buyer. Title insurance protects against past events connected to real property or previous owners that compromise the title held by the current owner. You need to know that the home you purchased is free and clear of liens, unpaid property taxes, encumbrances, and unknown defects from when the title policy was issued.
Undeniably, this fee could be high, but if someone out of the past brings a lawsuit on the property because of a past claim, you, the homebuyer, and the ender will be protected. The title search fee ranges from $60.00 to $15.000 and upwards. How much policy coverage should you have? Some say $2 per $1.000.Others say you should have over 125% coverage. I leave that up to you when you do your homework. Title fees will be a large part of the closing costs, so be prepared.
Escrow Fees!
The Escrow process begins when the home buyer and seller sign a sales contract. That contract and the earnest money check are delivered to the closing agent. The escrow agent accepts the escrow, usually by writing a notation on the contract. The escrow agent starts the closing process by opening a title search, which we mentioned above. By clicking on the link, you will understand the process better.>>click here
Recording Fees!
We are moving quickly towards the closing table. Recording fees are charged by the county where the property is located to register the transfer of ownership, and the transaction is made public. This process includes all the abovementioned costs, surveys, credit card charges, attorney’s fees, real estate commissions, and the new word for compensation. There will be credits and debits between the buyer and seller, and if all goes well, the homebuyer will be given the keys to their new home.
Closing costs can range from 2% to 5% of the total purchase of the house. Lenders must provide buyers with closing disclosure three business days before the closing date, including the recording costs, which could run around $125.00. Review the loan estimate very carefully. Look for any fees that seem excessive or unnecessary and inquire about them.
Here are other closing fees
1:Courier fee. In Illinois, a courier fee for the home starts around $25.00 and is used to transport mortgage documents via UPS or FedEx. The closing company needs the original documents, which must be notarized and backed up overnight. The bank usually charges the title company around $25.00, and the title company passes the fee to the homebuyer.
2: Credit reporting fee This fee covers the costs of pulling the buyer’s credit report and examining their credit score. It can range from $50.00 to upwards. The home buyer will pay for this fee.
3: Attorney’s fees: The lawyers representing both sides will receive payments for their services at the closing table. Their fees range from $268.00 upwards, and their costs will be deducted from the home’s sale price.
4: Real estate agent’s fees or compensation. Due to the recent court settlement, compensations are now more negotiable, and the costs might or might not vary from the past. The homebuying agent might get fully or partially compensated by the home seller, or the homebuyer will either partially or fully pay their agent fees based on their signed negotiated agreement.
5: Discount points. Discount points, also known as mortgage points or prepaid interest points, are fees paid to a lender in exchange for a lower interest rate on a mortgage. Points are a form of prepaid interest in which the borrower pays some interest upfront to receive lower interest rates over the life of the loan. This strategy is sometimes called buying down the mortgage. These points equal 1% of the mortgage value. Homebuyers pay this fee if they wish to exercise this option.
6:Survey fees. In Illinois, a mortgage survey can cost up to $500.00, depending on the property size. A survey is a prepaid expense that must be paid in cash at closing and cannot be rolled into the home’s financing. A survey is a requirement to establish the property’s boundaries, structures, easements, setbacks, potential encroachments, sub-surface improvements, etc. The person who asks for the survey will generally be the one who will pay for the survey.
Here are the final fees and taxes that must be settled and paid at the closing table
Transfer Taxes!
Depending on where you live in Illinois, a seller may pay the transfer tax. A transfer tax is a one-time fee imposed by the city, county, and state on the transfer of property ownership. In some areas, the buyer will pay the transfer tax. However, the buyer and seller must pay the Chicago transfer tax. Chicago charges $10.50 per $1.000.00 for real estate sold within the city limits. The buyer and seller will each pay a portion of this tax.
A: The state of Illinois assesses a transfer rate of 50 cents per 500.00 dollars of the sales price of a home.
B: The county of Cook assesses a transfer rate of 50 cents per $ 1.000
Please note that the transfer tax mentioned above applies only to Chicago. Check your local town, village, and city to see if they charge you this tax. Cook County’s rate will be consistent throughout the county, just like the state’s. The surrounding counties, such as Lake, Dupage, Kane Will, and others, have different tax rates. To get the transfer tax rates for those areas, visit the websites or offices of those government agencies.
Prepaid Expenses!
Prepaid fees are expenses that must be paid at the closing table. They are
A: Homeowners Insurance. The homebuyer must obtain proper home insurance coverage to own the home. If you wish to learn more on the subject, please click the link but disregard the link at the bottom requesting you to contact them to find an agent. I chose this article because it had the most information. Click here >>click here
B: Mortgage interests. Prepaid interest charges are due at closing for any daily interest that accrues on your loan between the date you close your mortgage loan and the period covered by your first monthly mortgage payment. The homebuyer is responsible for paying this fee.
Property Taxes!
Few people love to discuss property taxes, but they must also be addressed at the closing table. Why at the closing table? At the closing table, property ownership will be transferred from the home seller to the buyer. Depending on the month of sale, the home seller might have already paid their property tax bill for either the first part of the year or the rest of the year. They must be reimbursed since they will no longer live on the property. Keep in mind in the state of Illinois, property taxes are always paid in arrears. What does that mean? By clicking this link, I will let the expert explain it to you. click here
The title company experts will determine what will be given back to the homeseller and what the home buyer will have to pay through a debit and credit process between the home seller and buyer. This is another complex subject, so I will let the experts, not me, explain it again. Click this link>>click here
I also wrote a past post on the purpose of property taxes. To read it, click here.
Is there any way I can lower these costs as a home buyer?
Negotiations with the home seller are always possible. Some lenders offer no-closing-cost or zero-closing-cost mortgages where the closing costs are rolled into the loan, or the lender covers them in exchange for slightly higher interest rates. This option can help reduce upfront costs. Here is the best choice. Through negotiations with the listing agent, you come to a price agreement.
You then sign the deal with the agreed price, then add the added amount of so and so thousands of dollars with the stipulation that the home seller has agreed to the cost of $___. They, in return, will add the additional $___ and credit this amount back to the buyer. Thus, this extra money will cover your closing costs, financed through the mortgage loan. If done correctly, this is a game changer for many home buyers.
Last Major Point!
When purchasing an automobile, you go to the dealership, look at the cars on the lot, and fall in love with that shiny blue car with the fancy wheels. You talk to the car salesperson, you two agree on a price, and you think everything is settled, right? Wrong! That car salesperson then walks you to their financial manager for the bait and switch. That manager begins to spin your head with additional costs such as dealer prep, freight, destination, undercoating charges, and a list of all other things you knew nothing about. The cost to purchase that particular car has escalated beyond your price range. That is called sticker shock. Many have experienced this or know someone who experienced this when they bought an automobile. I got ripped off when purchasing my first car like this. Why did I use this example?
Purchasing a home is almost like buying an automobile, but a home will be the most significant investment of your life. Present and future homebuyers need to understand all steps of the closing process so they will not experience sticker shock. If you fall in love with a home with those fancy wheels or features and desires, knowing in advance that the home seller will not offer compensation for your closing costs, you will either come up with the additional money or look for another home. Beware of looking for another home.
Why? You fell in love with that first home; if you are forced to walk away, any other home will be let down. Secondly, remember the fee you paid your home inspector for the first home you loved was for that particular home only. Many homebuyers are unaware of this fact. Suppose they begin the home selection again and find another home. In that case, they will experience sticker or home shock when their inspector informs them that they must pay another upfront inspection fee.
You might also lose on other fees involved in buying that first home. More money out of your pocket, Ouch! Most will try to blame their agent. The real estate agent does not control your money reserves. Many first-time homebuyers can avoid this sticker shock by doing their homework and having this additional money in reserve so they will not experience this hardship. Yes! In Illinois, closing costs are expensive, but you will not experience sticker shock if you understand the game.
Conclusion!
This blog post was entitled “Home closing costs. What are they, and who pays what?” Wow! This was a profound subject, and if you took your time and read it, you are now an informed customer ready to pay closing costs. By reading this post, you now understand the meaning of closing costs. You now know the names of the fees that will be collected from either the home buyer or seller in the city of Chicago only. If you never knew about closing costs, you do now. If you live outside Chicago, please consult your local government or ask me to assist you in finding your local fees and rates. I can do that. How? Just ask me to help you find the home of your dreams. My office is located at 7300 N. Western Ave. is in the heart of the West Ridge/ Rogers Park area on the north side of the city of Chicago
Please don’t hesitate to contact me, but remember the new laws affecting home buyers in the housing market today. Homebuyers can attend any open houses they see without obligation. Once you, the homebuyer, ask a realtor to show you homes for sale on the market, the new rules/laws will kick in. Realtors cannot show a potential home buyer any property’s interior, whether in person, on Zoom, or through the MLS as we used to. The new law requires a person to sign an exclusive buyer agency agreement form before showing a home’s interior.
I am sorry, but that is the new law. Many homebuyers still refuse to sign this document, and when that comes up, we must tell them I am sorry. Have a good day. Why? Any Realtor that does not follow this law could be fined or lose their license. We are in the age of Big Brother; the MLS has made it known that they are monitoring our interactions with home buyers. I will not lose my license for people who do not wish to follow the rules. When you are ready, I will be here for you. I hope you found value in this post.
Until the next time
Charles McShan
312 9143678
Facebook http://www.Facebook.com/charlesmcshanrealtor/
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