When buying a house, it’s essential you consider adding all the associated costs into your budget. And this includes one of the most crucial categories of expenses—the closing costs. If you are set to buy a house, here’s what you need to know about the closing costs.
What Are Closing Costs?
Closing costs refer to the fees and charges other than the loan down payment that needs to be paid at settlement when purchasing a home. Both buyers and sellers have to pay closing costs, typically ranging from two to five percent of the house’s purchase price.
Generally, the buyer’s closing costs include homeowner’s insurance, property taxes, mortgage insurance, appraisal fees, and more. In contrast, the seller has to cover just the ownership transfer fees and the commission to their real estate agent.
As closing costs are charged to compensate the parties involved in funding, approving, and ensuring the sale, they aren’t included in the listed property purchase price. Hence, closing costs come as a surprise to most homebuyers who aren’t prepared for it.
What Makes Up Your Closing Costs?
Closing costs vary significantly, depending on where you live, the house you want to buy, the type of home loan you choose, etc. Here are the most common charges you can expect in your closing costs.
• Application Fee – The fee charged by the lender who processes your application. To avoid confusion, ask your lender what this fee covers before submitting the application. However, not all lenders charge an application fee, and it can usually be negotiated.
• Appraisal – The amount paid to the appraisal company to verify and confirm the house’s fair market value.
• Attorney Fee – The fee that should be paid to the attorney to analyze the closing documents for the lender or the buyer. Note that this isn’t mandatory in all states.
• Closing or Escrow Fee – Paid to the title company, attorney, or escrow company for conducting the closing. While a title company or escrow can supervise the closing process as an independent party in your house purchase, some states make it mandatory for a real estate attorney to be present at the closing.
• Courier Fee – It covers the cost associated with document transportation for the loan transaction.
• Escrow Deposit for Property Taxes & Mortgage Insurance – Typically, you will be asked to put down two months of mortgage insurance payments and property tax at the closing.
• Life of Loan or Flood Determination Coverage – Paid to a third-party if the property you are purchasing is located in a flood zone. If your property is situated within a flood zone, you will have to buy flood insurance, which should be paid separately.
• Home Inspection – Paid to verify the home’s condition and check for repairs that might be needed before closing.
• Homeowner’s Insurance – This insurance covers any potential damages to your home. The first year’s insurance should often be paid at closing.
• Lead-Based Paint Inspection – Paid for evaluating your home for lead-based paint risk.
• Origination Fee – It covers the lender’s administrative costs and ranges at around one percent of the total loan. Nevertheless, sometimes you will be able to find home loans with no origination fee.
• Pest Inspection – Paid for inspecting your home for termites or dry rot. This isn’t required in some states but is mandatory to get government loans. If termites, dry rot, or other wood damages are detected, repairs often tend to be quite expensive.
• Private Mortgage Insurance (PMI) – If your down payment is less than 20 percent of the home’s purchase price, you will likely be asked to pay PMI. In such cases, you will have to pay the first month’s PMI payment at closing.
• Property Tax – Often, lenders want any taxes due within the first 60 days of purchase to be paid at closing.
• Recording Fee – The charge from the local recording office for recording public land records.
• Survey Fee – Paid to the surveyor to analyze and ensure all property lines and other aspects like shared fences on the property.
• Title Company Search or Exam Fee – Paid to the title company for conducting a thorough search of the property’s records. The title company ensures that no other individual has a claim on the house you plan to buy.
• Underwriting Fee – Paid to the lender to cover the cost of investigating whether or not to approve your loan.
How Much Are Closing Costs?
Typically, home buyers will end up paying anywhere between two and five percent of their home’s purchase price as of closing fees. So, if your home costs $200,000, you might have to pay between $4,000 and $10,000 in closing costs.
Your lender has to provide you with a Loan Estimate for your loan within three business days after you submit a loan application. This estimate will contain information about what the closing costs for your home will be. But, as the name suggests, it is just an estimate, and most of the fees listed in it can vary. If they do change, you will be provided with a revised Loan Estimate.
Usually, most of the fees contributing to the closing costs are negotiable, and some are entirely unnecessary. For instance, things like mailing or courier costs, high administrative, etc., aren’t mandatory.
Remember that you have the option to shop around and look for other lenders who might be able to offer you a loan with lower fees at closing. Hence, once you get the Closing Disclosure statement with closing costs, compare it with your Loan Estimate and ask your lender to clarify what each line item in your closing costs refers to and why it is required.
There are possibilities that the closing costs may change between your Loan Estimate and the Closing Disclosure. Review and compare both documents carefully, so there are no surprises, and you are free to walk away with your keys at closing.
Have Questions? Ask Pete Maver!
Your real estate agent is the best source of information about the local community and real estate topics. Give Pete Maver a call today at 248-705-2753 to learn more about local areas, discuss selling a house, or tour available homes for sale.