Before you get the keys to your new house, you’ll have to sign various paperwork for the loan documents and fill out documents that will transfer the property to you from the seller. During the home purchase, third parties like your mortgage lender and your real estate attorney have performed various services. Closing costs for buyers include the fees that must be paid.
What are home closing costs?
Closing costs are fees outside of the purchase price of the home, which are due when the transaction is coming to a close. There are closing costs for both the seller and the buyer. Closing costs usually include fees that are related to the real estate commissions, mortgage loans, insurance premiums, taxes and other such details. Closing costs have to be discussed in advance and agreed upon by both parties before the deal is done.
What are the average closing costs?
Closings costs are usually three to six percent of the purchase price of the property. Therefore, if you buy a home priced at $200,000, your closing costs could end up between $6,000 and $12,000. These fees change from state to state and may also vary depending on your mortgage lender and type of loan.
A lender is legally required to give you a loan estimate in three business days following the receipt of your mortgage application. This document is important, as it details the estimated closing costs you can expect to pay. Three business days before closing, the lender has to give you a closing disclosure form. On this form, you’ll see the original closing cost estimation along with the final closing costs. If you see any new fees that were not originally discussed, get clarification on them before moving forward.
Types of Closing Costs When Purchasing A Home
Application Fee
When seeking a mortgage, a loan application fee could be charged in order to process the preparation of the document. Be sure to ask the lender for details before applying.
Attorney Fee
Attorney fees are charged by real estate attorneys in order to review and prepare the home purchase contracts and agreements. Not every state requires an attorney to handle this.
Closing Fee
Commonly referred to as an escrow fee, a closing fee is paid to the entity that handles the closing. This could be an escrow company, a title company or an attorney.
Courter Fee
If you are signing any paper documents, this fee helps the paperwork go through in a timely manner. If you handle the closing digitally, you may not have to pay this fee.
Credit Report Fee
The lender pays is $15 to $30 to get credit reports from the three main bureaus that report it. Some lenders might not charge this fee at all, as they receive a discount from these agencies.
Escrow Deposit
A few lenders might require that you put two months’ worth of mortgage insurance and property tax payments into what is called an escrow account.
FHA Mortgage Insurance Premium
An FHA loan will require that you pay an upfront mortgage insurance premium consisting of 1.75 percent of the base loan number. This is to be paid during the closing, or it can be added to the cost of the mortgage.
Flood Determination and Monitoring Fee
This fee is charged to allow a flood inspector to see if a property is in a flood zone. If it is, the buyer will need to get flood insurance. A portion of this fee includes perpetual observation to make sure the property’s flood risk status stays the same.
HOA Transfer Fee
If you buy a home, townhouse or condo in a planned development, you will have to join the HOA or homeowner’s association. It is a transfer fee that will take care of the price of changing ownership including document costs. The seller will need to provide evidence of the HOA dues as well as a copy of the notices, financial statements and minutes from the HOA.
Homeowners Insurance
A lender often requires prepayment for the homeowner’s insurance covering the first year, which is due at closing.
Lender’s Title Insurance
This fee is a one-time, upfront fee that goes to the title company to protect the lender if there is a lien or an ownership dispute that didn’t come up during the title search.
Lead-Based Paint Inspection
The buyer will need to pay an inspector to figure out if the property has any lead-based paint, something that is possible if the house was built before 1979.
Points
Otherwise called discount points, these are upfront but optional payments that are made to the lender to take some money off of your interest rate, which can reduce the monthly payment. One point will count for one percent of the loan.
Owner’s Title Insurance
A title insurance policy will protect you should someone challenge the ownership of your new home. This is typically an optional choice, which legal experts recommend and usually costs between 0.5 and one percent of the whole price.
Origination Fee
This fee covers the administrative costs for the lender, which they need to process the fees. The cost is usually one percent of the amount of the loan. Some lenders won’t charge this fee, but if they don’t, they will usually require a higher interest rate in order to cover that cost.
Pest Inspection
This fee takes care of the price of a professional pest inspection to look for dry rot, termites or other such damage. Some states and a few government-insured loans will require this inspection. The cost of the fee is about $100.
Prepaid Daily Interest Charges
This is a payment that covers any pro rata, which describes the proportional value of a part in comparison to its whole. This charge accrues from the date the mortgage closes until the first mortgage payment is paid.
PMI
Private mortgage insurance or PMI is required if the down payment is less than 20 percent. The buyer may have to make the first month of this payment during closing.
Property Appraisal Fee
This change is required to be paid to a professional home appraiser to verify the home’s fair market value. It is also used to calculate the loan to value ratio. This fee is typically between $300 and $500.
Property Tax
During closing, the buyer will likely have to pay pro rata property taxes. These taxes will need to be paid from the time you close until the end of the tax year.
Rate Lock Fee
Also known as locking in, this fee is charged by the lender to guarantee the buyer a designated interest rate for a period of time. The fee usually goes into effect from the time of pre-approval until the mortgage closes.
Real Estate Commissions
One of the larger fees, real estate commissions are typically paid by sellers, not buyers. The commission commonly charged is five to six percent of the gross price of the home. Then, it is split between the buyer’s agent and the seller’s agent. The fees can usually be negotiated.
Recording Fee
This fee is charged by a local recording office, typically a county clerk or city’s office, in regard to the processing of official public land records.
Survey Fee
This fee is charged by a company that surveys properties in order to check shared fences and property lines. The purpose is to confirm the boundaries of the property.
Tax Monitoring Fee
This is a third-party fee for keeping tabs on the payment of property taxes that lets your lender know if there are any issues.
Title Search Fee
The title company charges a fee to look at the records of public property for any discrepancies in ownership.
Transfer Tax
A transfer fee may be levied depending on when the title is transferred from the seller to the buyer.
Underwriting Fees
Underwriting fees are charged by the lender to cover the work done in analyzing and approving the mortgage application and loan.
VA Funding Fee
If you are a VA borrower, this fee will help you offset the costs of the loan program to the taxpayers.
Tips to Reduce Closing Costs
Shop Around
Look for various third-party services and lenders, including title companies and homeowners insurance policies to find the best prices on fees.
Schedule the Closing Smartly
Try to schedule the closing on or near the end of the month, which helps reduce prepaid daily interest fees.
Ask the Seller for Help
You may be able to convince the seller to cover a portion of the closing costs or lower the selling price to help you pay.
Compare the Closing Disclosure Forms and Loan Estimate
When you receive your first loan estimate, look over it carefully. Ask the lender to clarify different fees. If there is any noticeable rise in fees, talk to the lender before you make the purchase. It isn’t uncommon for fees to change a bit, but there should be no large jumps. Make sure you are wary of lenders who want to add unnecessary fees, which often duplicate the ones that already exist. Some may even try to sneak in fees that were not discussed in advance.
There are many fees that go into the final closing cost of a home. Though typical closing costs are predictable and mostly stay the same from the initial estimation, they can quickly add up. Therefore, it’s important to account for the costs when budgeting for the purchase of the home and even leave a little wiggle room just in case. Shave off some of the cost by being smart about who you choose to work with and by paying attention to the disclosures.
