Closing Costs 101:
Closing costs are fees associated with your home purchase that are paid at the closing of a real estate transaction. Closing is the point in time when the title of the property is transferred from the seller to the buyer. Closing costs are incurred by either the buyer or seller.
Buying a home is the largest investment most of us ever become involved in. Here are some of the fees you can expect at closing. The list is inclusive of fees you may see, but it’s not likely that your loan will include all of the fees listed here.
- Application Fee: This fee covers the cost for the lender to process your application. Before submitting an application, ask your lender what this fee covers. It can often include things like a credit check for your credit score or appraisal as well. Not all lenders charge an application fee, and it can often be negotiated.
- Appraisal Fee: This is paid to the appraisal company to confirm the fair market value of the home.
- Attorney Fee: This pays for an attorney to review the closing documents on behalf of the buyer or the lender. This is not required in all states.
- Closing Fee or Escrow Fee: This is paid to the title company, escrow company or attorney for conducting the closing. The title company or escrow oversees the closing as an independent party in your home purchase. Some states require a real estate attorney be present at every closing.
- Courier Fee: This covers the cost of transporting documents to complete the loan transaction as quickly as possible.
- Credit Report: A Tri-merge credit report is pulled to get your credit history and score. Your credit score plays a big role in determining the interest rate you’ll get on your loan.
- Escrow Deposit for Property Taxes & Mortgage Insurance: Often you are asked to put down two months of property tax and mortgage insurance payments at closing.
- FHA Up-Front Mortgage Insurance Premium (UPMIP): If you have an FHA loan, you’ll be required to pay the UPMIP of 1.75% of the base loan amount. You are also able to roll this into the cost of the loan if you prefer.
- Flood Determination or Life of Loan Coverage: This is paid to a third party to determine if the property is located in a flood zone. If the property is found to be located within a flood zone, you will need to buy flood insurance. The insurance, of course, is paid separately
- Home Inspection: You will likely get your own home inspection to verify the condition of a property and to check for home repairs that may be needed before closing.
- Home Owners Association Transfer Fees: The Seller will pay for this transfer which will show that the dues are paid current, what the dues are, a copy of the association financial statements, minutes and notices. The buyer should review these documents to determine if the Association has enough reserves in place to avert future special assessments, check to see if there are special assessments, legal action, or any other items that might be of concern. Also included will be Association by-laws, rules and regulations and CC & Rs.
- Homeowners’ Insurance: This covers possible damages to your home. Your first year’s insurance is often paid at closing.
- Lender’s Policy Title Insurance: This is insurance to assure the lender that you own the home and the lender’s mortgage is a valid lien, and it protects the lender if there is a problem with the title. Similar to the title search, but always a separate line item.
- Lead-Based Paint Inspection:Covers the cost of evaluating lead-based paint risk.
- Loan Discount Points:“Points” are prepaid interest. One point is one percent of your loan amount. This is a lump sum payment that lowers your monthly payment for the life of your loan.
- Owner’s Policy Title Insurance: This is an insurance policy that protects you in the event someone challenges your ownership of the home. It is usually optional.
- Origination Fee: This covers the lender’s administrative costs. It’s usually about 1 percent of the total loan but you can sometimes find mortgages with no origination fee.
- Pest Inspection: This fee covers the cost to inspect for termites or dry rot, which is required in some states and required for government loans. Repairs can get expensive if evidence of termites, dry rot or other wood damage is found.
- Prepaid Interest:Most lenders will ask you to prepay any interest that will accrue between closing and the date of your first mortgage payment.
- Private Mortgage Insurance (PMI): If you’re making a down payment that’s less than 20% of the home’s purchase price, chances are you’ll be required to pay PMI. If so, you may need to pay the first month’s PMI payment at closing.
- Property Tax: Typically, lenders will want any taxes due within 60 days of purchase by the loan servicer to be paid at closing.
- Recording Fees: A fee charged by your local recording office, usually city or county, for the recording of public land records.
- Survey Fee: This fee goes to a survey company to verify all property lines and things like shared fences on the property. This is not required in all states.
- Title Company Title Search or Exam Fee: This fee is paid to the title company for doing a thorough search of the property’s records. The title company researches the deed to your new home, ensuring that no one else has a claim to the property.
- Transfer Taxes: This is the tax paid when the title passes from seller to buyer.
- Underwriting Fee: This also goes to your lender, covering the cost of researching whether or not to approve you for the loan.
- VA Funding Fee: If you have a VA loan, you may be required to pay a VA funding fee at closing (or you can roll this fee into the cost of the loan if you prefer). This is a percentage of the loan amount that the VA assesses to fund the VA home loan program, however some borrowers are exempt from this fee. The percentage depends on your type of service and the amount of your down payment.
How Much can you expect a Closing Cost to be?:
On a typical home purchase, home buyers will pay between about 2 to 5 percent of the purchase price of their home in a closing fee. For example, if your home cost $150,000, you might pay between $3,000 and $7,500 in closing costs. According to a recent survey, buyers pay roughly $3,700 in closing fees, on average. Within three business days of receiving your completed loan application, your lender will give you a Loan Estimate for your loan. Although, these are just an estimate, and many of the fees listed can change. If they do change, you may receive a Revised Loan Estimate so there are no surprises along the way. Many of these fees that make up closing costs are negotiable, some being completely unnecessary (administrative, mailing or courier costs charged by your lender). Other lenders may be willing to offer a loan with lower closing fees.
Your Lender should give you the Closing Disclosure Statement at least three days prior to your closing. You now can compare the closing discourse to your loan estimate and ask your lender to explain your closing costs and why it is needed. There are limitations on the amount of number of fees can increase from the Loan Estimate to the Closing Disclosure. This is to reduce any shocks; if there are any, you can still walk away at closing.
How can home buyers avoid Closing Costs?
In every real estate transaction, there are closing costs. Although, home buyers can avoid upfront fees on your load by getting a “no-closing cost mortgage.” In this case, you do not pay any of the closing cost when you close on the mortgage. If a lender offers a deal like this, it will end up costing you in the long run. The lender may charge you a higher interest rate on the loan for not paying closing costs, or the lender may wrap the closing fees into the total mortgage owed, in which case you end up paying interest on the closing costs.
Just to make it more confusing, closing costs vary by location. Every state, city, and county has the authority to add fees, sometimes called transfer taxes or impact fees, to your transaction. Finally, home buyers can negotiate with the seller over who pays these fees. Sometimes the seller will agree to presume the buyer’s closing fees.
This summary was taken from an article by Zillow, “What are closing costs and how much are they?” and Realtor.com, “How to Reduce Closing Costs—6 Strategies for Lowering Your Expenses.”