Purchasing your own home is an expensive endeavor and often times the largest investment an individual will make in their lifetime. Saving money for the initial down payment alone can take a prospective buyer years to accomplish, and this does not include another large upfront cost – closing costs.

A portion of the 2-5% you pay in upfront closing costs is often non-negotiable due to federal mortgage laws. Certain fees remain the same through any lender, while others including origination, underwriting, and doc-preparation fees may be negotiated. Each fee will be clearly outlined on your HUD-1 settlement statement and initially on the Good Faith Estimate (GFE). Lenders are required to provide the GFE within 3 business after accepting a complete loan application.

In high-cost areas such as New York or Texas, the stress of negotiating can very well be worth it with closing costs that can range from $4,500 to $5,500 on a $200,000 loan. As mentioned, most of the fees that show up on your HUD-1 settlement statement are required for any mortgage loan. Ways you can negotiate include:

Shopping Around – Get a GFE

The GFE will list the basic information about the terms of the loan you’re applying for and will supply you with estimated costs for acquiring the loan, as required under the Real Estate Settlement Procedures Act (RESPA). Since it’s established that all mortgage lenders must charge certain fees at the same rate by law, one of the most effective ways to pay the least amount is to shop around and look for the lender with the lowest fees. It’s unlikely that the fees will vary much from lender-to-lender, but this is a great way to get a feel of the individual and company you’re working with. Always work with a reputable loan office who will take their time to answer each and every question you may have about the loan process.

Opt for a Higher Interest Rate

Although most prospective buyers are shopping for the lowest interest rate possible, the truth is that locking-in a higher loan rate may actually enable you to take advantage of discounts on the fees – i.e. rolling some of the costs into the loan. This is not the most favorable route as you’ll be subject to higher monthly payments and will likely pay thousands of dollars more over the course of the loan, but this can ease the pain of having to come up with more money upfront.

Choose a Lower Purchase Price

This is an obvious but simple solution for cash-strapped buyers. The lower your home costs, the less in fees you’re likely to pay – including the cost of title insurance. Title insurance is a must have when buying a property because it protects you and the lender’s interests in the property is a dispute over ownership arises. By shopping around for the best deal or lowering your purchase price range, you can save extra since title fees cost around $500 for every $100,000 borrowed.

Compare Homeowners Insurance Offers

Homeowners insurance is vital for every homeowner. Annual costs for homeowner insurance policies typically range from $300-$1,000 (or more) annually – depending on the home’s value, type of property and the area you wish to live. Because homeowner insurance is through individual companies and not a lender, you may be able to negotiate more effectively for the cheapest policy.

Tip: Contact an insurance agency you already work with and inquire about discounts for “bundling.”

Ask the Real Estate Agent to Contribute

This option may seem a little farfetched, however there are certain scenarios that aid in making this possible. If you’re a repeat buyer and happen to be using the same agent to list your current home for sale while at the same time having them help you find your new home, simply ask your trusted agent if they’re willing to contribute to your closing costs. In an instance where the agent helps you find a home quickly, the business acquaintance may feel obliged to contribute to your closing costs in order to avoid searching for weeks or months – saving you both time and money in the long run. In return, they receive two handsome commissions for the two sales and you save a couple hundred or thousand in closing costs.

Ask the Seller to Contribute

This is another scenario that allows some flexibility with negotiating and many prospective buyers have no clue this is even an option, however there are rules you must follow. 1. you can’t be paid to buy a home, any seller/agent contributions must not exceed the actual closing cost amount 2. these contributions can’t exceed lender limits. It would be wise to check the limits with your lender prior to any negotiating.

Tip: Don’t tell your loan officer right before closing that the agent/seller is contributing to the closing costs, this will only drag out the loan process further as any contribution must be included when the loan goes through underwriting. Also, know when to ask. Your agent will be well aware of the current status of the housing market and whether or not you’re in a “buyer’s or seller’s market.” If you’re in a seller’s market and properties are in high demand and low inventory, it’s generally much more difficult to negotiate these costs.

Seller’s maximum contribution based on loan type:

  • Conventional loan with less than 10 percent down = three percent of purchase price.
  • Conventional loan with more than 10 percent down = six percent of purchase price.
  • Conventional loan for investment/rental property = two percent of purchase price.
  • Federal Housing Administration (FHA) loan (no down payment regulations) = six percent of purchase price.
  • Veterans Affairs (VA) loan (no down payment required for VA financing) = four percent of purchase price.

Note: Jumbo and portfolio loan programs may have different restrictions for maximum seller contributions so always check with your trusted loan officer or RE agent.