A couple weeks ago, The New York Times published an article about how home buyers can reduce their closing costs. This topic is particularly relevant as the spring home-buying season kicks in, because many buyers will begin the process of shopping both for a home and for a mortgage.

While many buyers focus their negotiating efforts on getting the best price on a home and securing the lowest interest rate possible, they often forget they can take steps to reduce the costs associated with finalizing the transaction.

In its publication, “A Consumer’s Guide to Mortgage Settlement Costs,” the Federal Reserve estimates closing costs can range from 3 to 6 percent of the price of the home. On a $190,000 mortgage amount with a 5 percent down payment, the Federal Reserve says the closing costs can range anywhere from $6,235 and $19,930.

Because the costs can be high, it’s worth discussing what can be done to reduce them. According to the New York Times article, the top tip for keeping closing costs under control is “old-fashioned haggling.” That’s because many consumers don’t realize many of the lender’s fees are negotiable. Buyers need to get estimates from multiple lenders and ask questions about the fees being charged.

Another top tip is to understand the new Truth-in-Lending rules. Implemented in January 2010, the government now requires lenders to provide consumers with a Good Faith Estimate within three days of submission of a formal loan application. The new Good Faith Estimate provides home shoppers with a clear view of what it will cost to get a loan and the price of other services associated with getting a mortgage.

What’s nice about this new document is it makes home loan shopping a little easier. Prior to its implementation, apples-to-apples comparisons of costs were difficult because the fees had a variety of names. Now the origination charges are listed in an easy-to-understand box that’s comparable across multiple lenders. There’s also information about what required services borrowers can shop for on their own rather than using the lender’s vendor.

While lenders are obligated to provide consumers with a Good Faith Estimate after they apply for a loan, mortgage shoppers are not required to use that particular lender. In fact, the new GFE has a “Shopping Cart” section that encourages consumers to compare the terms and fees for multiple loans.

Mortgage shoppers should also note that once they decide to move forward with a loan as presented on a Good Faith Estimate, the fees cannot drastically change when they are ready to close. In fact, there are three categories of fees: those that cannot increase at settlement, those that can increase up to 10 percent at settlement and the charges that can change at settlement. Generally speaking, the lender’s charges are not allowed to change, services from vendors selected by the lender can only increase up to 10 percent and services the borrower shops for can change.

These thresholds are nice because they allow the consumer to do meaningful home shopping. Rather than having surprise costs at the closing table, borrowers can be much more confident in knowing what the closing costs will be ahead of time, which makes it easier to negotiate.

Borrowers should note, however, that some lenders are providing informal worksheets when there is not an actual loan application. These may be helpful in the beginning stages, but consumers should know the difference between a worksheet and a real Good Faith Estimate. This is important because the worksheets do not have the same rules as a GFE, which means the costs and fees could change later on.

My final tip reiterates the first: Don’t be afraid to ask for a lower price. There is nothing in the Good Faith Estimate that prevents lenders from overestimating, so it’s to the consumer’s advantage to drive a hard bargain, especially when hundreds of dollars are at stake.

To learn more about saving money on your real estate transaction, contact your local REALTOR®.

By Kenny Parcell
Appeared in the Salt Lake Tribune and Deseret News February 19, 2011