Closing costs can be a painful surprise to new home buyers.
What are closing costs?
They’re a range of expenses and services when buying a home. The majority of closing costs will fall on the buyer, but the seller will be responsible for some as well.
In most cases, buyers can expect to pay between 2% and 5% of the purchase price on closing fees. So, if the home costs $200,000, expect to pay between $4,000 and $10,000 in closing costs.
Understanding how closing costs work and what they cover will help you budget accordingly to ensure a smooth transaction in the final stages of buying a home.
1. Appraisal Fee
Lenders need to know how much a property is worth before they can approve a loan. There are two main reasons for this.
- To make sure the amount you want to borrow is justified.
- The lender needs to be able to recoup the value of the home if the buyer defaults on the loan.
The cost associated with an appraisal will vary depending on the complexity of the process and the location of the property. But the typical cost of a home appraisal is $300 to $400.
2. Home Inspection
A home inspection is different from an appraisal. The purpose of an appraisal is to get an approximate value of the home, whereas the inspection assesses the condition of a house.
Before a bank lends you hundreds of thousands of dollars, the bank wants to know that the house is structurally sound and safe to live in. And so should you.
The results of a home inspection can give the buyer some leverage to negotiate the sale price. If severe problems are discovered, you might have the option to back out of your contract if you can’t come to an agreement with the seller on how to fix those issues.
Home inspections are roughly $300 to $500.
3. Application Fee
An application fee covers the cost to process a request for a new loan.
It includes costs related to administrative expenses and sometimes covers credit checks depending on the lender. Some lenders will charge an application fee just to make sure that the buyer doesn’t go elsewhere for a loan.
Application fees can be as low as $25 or as high as $150.
4. Credit Report
Lenders need to run a full credit report on a buyer before offering the terms of a mortgage loan.
In some cases, the credit check will be included in the application fee. But it’s not uncommon for lenders to charge a borrower separately for a credit report.
Credit report fees are usually $20 to $30, at most.
5. Origination Fee
The loan origination fee is also known as the underwriting fee, processing fee, or the administrative fee. Lenders charge an origination fee to evaluate and prepare a mortgage loan.
It covers notary fees, document preparation, and the cost of the lender’s attorney.
Origination fees are usually based on the amount of the loan. Buyers should expect to pay about 0.5% of the amount borrowed. For example, a $200,000 mortgage would result in a $1,000 origination fee.
6. Attorney Fees
In some states, it’s required for an attorney to be present at the closing of any real estate purchase. Even if this is not a requirement in your state, it’s still in your best interest to hire an attorney if you’re buying a home.
Your attorney will make sure all of your documents and contracts are legally sound.
Attorney fees vary based on the rate and how many hours they work for you. Real estate lawyers charge anywhere from $150 to $350+ per hour.
7. Assumption Fee
Some homes have an assumable mortgage. This means that the loan can be transferred from the current owner to the subsequent one. The interest rate and terms stay the same on an assumable mortgage.
For example, if a 30-year mortgage is five years old, the buyer assuming the loan has 25 years to pay it off.
If you’re assuming a mortgage, you can expect to pay a variable assumption fee based on the balance of the loan.
8. Prepaid Interest
Interest accrues on mortgage loans between the settlement date and the due date of your first monthly payment. Lenders typically require the buyer to pay the interest accrued during this time.
As a buyer, you should be prepared to pay this amount at the closing. The cost of prepaid interest fees will depend on the size of your loan.
9. Mortgage Broker Fee
Mortgage brokers act as a middleman between borrowers and lenders. If you hire a mortgage broker, they’ll work on your behalf to find competitive interest rates and loan terms from different banks and lenders.
While a broker can help you get a good deal, they’ll need to be compensated accordingly.
Mortgage brokers are either paid by the lender or the borrower. Compensation ranges from 0.50% to 2.75% of the loan amount. Federal law prohibits mortgage brokers from making more than 3%.
10. Title Search Fee
The purpose of a title search is to ensure that the person selling the property is the legal owner. A title search will also uncover any outstanding liens or claims against the house.
If the real estate records aren’t computerized in your area, the title search can be a labor-intensive process. The cost for a title search will vary based on the company and region, you should expect to pay about $200.
11. Title Insurance
There are two types of title insurance that are associated with closing costs:
- Lender’s Title Insurance — Lenders require this loan policy as protection if there is an error in the title search. Coverage lasts until the loan is paid off in case someone claims ownership of a property after the sale.
- Owner’s Title Insurance — This coverage protects you, as the buyer, in case claims are made against the property after the closing. Coverage lasts as long as you own the property and typically costs about 0.5% to 1% of the purchase price.
It’s possible to get the seller to pay for your title insurance costs, but that’s up for negotiation. Sometimes discounts are available if the lender and owner purchase a protection policy at the same time.
12. Survey Fee
Getting a property surveyed is usually required by a lender before the loan is finalized. Even if your lender doesn’t require this, as a buyer, you should always get your land surveyed before you buy a house.
The survey fee can either be paid by the buyer or the seller. The costs are used to confirm the dimensions and size of the property.
13. FHA, USDA, and VA Fees
All loans insured by the Federal Housing Administration are subject to FSA mortgage insurance premiums. Loans guaranteed by the US Department of Agriculture or the Department of Veterans Affairs are subject to guarantee fees as well.
- The FHA requires an upfront prepayment of 1.75% of the loan.
- The USDA loan upfront guarantee fee is 1% of the loan amount.
- VA guarantee fees are between 1.25% and 3.3% of the loan amount, depending on the down payment.
14. Mortgage Insurance Fees
Some lenders will require you to pay a year’s worth of mortgage insurance premiums upfront. Other lenders require a lump-sum payment to cover the entire duration of the loan.
Mortgage insurance fees typically cost between 0.55% and 2.25% of the purchase price.
15. Property Taxes
It’s common for buyers to pay two months’ worth of property taxes at the closing. These cover both city and county taxes.
The amount of tax paid depends on the value of the property, your income, household status, and local government rates.
16. Homeowners Insurance Premium
Most lenders will require the buyer to purchase a home insurance policy before the settlement is finalized. This keeps you protected in case of damage, vandalism, burglary, and more.
If the property has an HOA fee, the association might include insurance premiums in the monthly dues. So if you’re buying a condo or other property with an HOA, be prepared to pay those dues upfront as well.
17. Escrow Account Fees
An escrow company is responsible for handling all of the funds involved in the real estate transaction. It’s their job to make sure all parties fulfill their payment obligations and get paid appropriately.
For example, at the time of the closing, the buyer will wire a down payment and closing costs to the escrow account, and the lender will wire the loan amount to the account as well. The escrow company pays off the loans, pays third-party providers, and sends the remaining funds to the seller.
Escrow fees are usually based on the purchase price or loan amount. This is also known as the closing fee or the settlement fee.
18. Discount Points
The discount points, also known as discount fees, are paid to the lender to lower your interest rate. This is commonly referred to as “buying down the rate.”
For example, if you pay 1% of the loan amount (one discount point), the lender will reduce your interest rate by a specific percentage amount. In most cases, paying one point reduces the rate by 0.25%, but this varies depending on the lender, loan type, and current interest rates.
19. Real Estate Commission
Real estate commission fees are split between the buyer’s agent and the listing agent. Commissions can range from 5% to 8% of the sale price, but 6% is the industry standard.
The commission fees are almost always paid by the seller, unless otherwise negotiated.
20. Title Transfer Fees
Another common fee paid by the seller is the transfer tax. This legally transfers the seller’s property rights to the buyer.
Title transfer fees vary by region. But it’s usually a fixed amount per every $1,000 of the sales price, such as $5 or $7.50.
Buying a home is not as simple as paying a down payment and getting approved for a mortgage. You need to have a clear understanding of other closing costs, so you’re not surprised by additional fees.
Having the funds ready to pay your closing costs will ease the transaction process in the final stages of the sale.
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