When you buy a property, you must bring more than just your down payment to the closing table. Closing costs are expenses paid after the down payment, such as appraisal fees, legal fees, and escrow funds.
Many first-time home purchasers misjudge the amount they will have to spend on closing costs. Some purchasers may be unaware that there are options to lower the amount they will pay.
Closing costs might be tough to understand, so we’ll provide a breakdown of everything you need to know about closing costs before finalizing your loan.
What Are Closing Costs?
Closing costs are paid at closing for your mortgage. These fees are incurred during the loan creation process. Closing costs include fees such as those related to the home’s appraisal and title searches. The specific closing costs you must pay may vary depending on the type of loan you acquire and where you live.
How Much Are Closing Costs?
Closing costs are usually between 3% and 6% of the loan amount.
These costs do not include your down payment, although they may be negotiable. Just keep in mind that your negotiation power might be highly influenced by the sort of market you find yourself in.
Who Pays Closing Costs?
Closing fees are paid by both purchasers and sellers. However, the buyer is usually responsible for the majority of them. You can negotiate with a seller to help cover closing costs as part of their seller concessions. This can be extremely helpful in lowering the cost of your home purchase.
Sellers are limited in how much they can contribute toward closing costs. The seller’s contribution is limited to a certain portion of the mortgage value, which varies depending on loan type, occupancy, and down payment.
A breakdown of seller concessions limits for conventional loans can be seen below. The percentage shown is based on the purchase price or appraised value, whichever is lower.
For primary residences:
|Down Payment||Concession Limits|
|Down payments of 25% or more||9%|
|Down payments of 10% – 24.99%||6%|
|Down payments less than 10%||3%|
For second homes:
|Down Payment||Concession Limits|
|Down payments of 25% or more||9%|
|Down payments of 10% – 24.99%||6%|
Federal Housing Administration (FHA) loans are much more straightforward, and the contribution limit is 6% based on the lesser of the appraised value and the purchase price.
Veteran Affairs (VA) loan seller concessions have a few distinct regulations depending on what they’re used for. Up to 4% in seller concessions can be applied to discount points, origination charges, surveys, appraisals, and credit report fees.
The remainder of the concessions can be allocated to prepaid escrows such as taxes and insurance, as well as the VA financing fee.
Closing Costs For A Buyer?
Closing costs will vary depending on the buyer. Some expenses are required by lenders, some by the government, and others may vary depending on the scenario. The amount you must pay will be determined by where you reside, your lender, and the sort of loan you take out.
Your lender will offer you a document called the Closing Disclosure at least three working days before your closing meeting. This will include all of the closing costs and how much you owe.
To complete your loan request, some lenders charge an application fee. This cost varies by lender, but it can reach $500. This might be a separate charge or a deposit that can be used to other closing fees later.
Your lender will ask for an appraisal; from a third-party appraisal management company, which will send a professional appraiser to inspect your home and establish its value. They’ll do some basic safety checks to ensure the property is ready for occupancy. Appraisals are significant because they determine the worth of the property, which influences how much you may borrow. This also guarantees that you are not overpaying for a home.
Your closing fee is paid to the escrow company or attorney who handles your closing. In some states, every closing requires the signature of an attorney. These fees vary based on your state and whether or not an attorney is required to attend your closing.
Escrow funds, also known as reserve fees or prepaids, store cash reserved for property taxes, homeowners insurance premiums, and mortgage insurance. Your lender stores your escrow funds in a separate account and utilizes them to make payments on your behalf as part of your regular mortgage payment.
At closing, your lender may require you to deposit a few months’ worth of expenses into an escrow account. Although the amount of months depends on your lender, many purchasers put down two months’ worth of costs at closing.
FHA Mortgage Insurance
With an FHA loan, you must pay a mortgage insurance premium at closing. The current MIP rate is 1.75% of the principal amount of your loan.
Homeowners Association Transfer Fee
If your property is in a homeowners association, your transfer fee covers the expense of moving HOA fees from the seller to the buyer. It guarantees that the seller’s HOA dues are up to date and provides you a copy of the association’s payment and dues schedule as well as HOA financials.
This is usually covered by the seller. However, if you are purchasing in a highly competitive market, you might need to pay a transfer fee. The cost of your transfer is determined by the regulations of your HOA. If you reside in an area without a HOA, you will not be charged this fee.
Homeowners insurance is a type of protection that compensates you in the event that your house is damaged. As a condition of your loan, most mortgage lenders require you to have at least a certain amount of homeowners insurance to cover damage. You may also receive coverage for your home’s belongings as well as liability coverage if someone is hurt on your property.
Many lenders need a year’s worth of homeowners insurance to be paid at closing. Expect to spend around $50 per month for every $100,000 in house value.
Loan Origination Fee
Loan origination fees cover the costs of loan processing and underwriting. These costs are paid to your lender in exchange for underwriting and preparing loan documentation. Origination fees are typically 1% of the loan amount. This, along with mortgage discount points, will appear on your Loan Estimate as origination charges.
Lender’s Title Insurance
Lender title insurance protects the lender in the event that you lose your house due to a title claim. Unlike other forms of insurance, lender’s title insurance is only required once at closing.
Owner’s title insurance is distinct from lender’s title insurance, which normally costs between.5% and 1% of the mortgage.
Private Mortgage Insurance (PMI)
If you put less than 20% down on a conventional loan, your lender will require you to pay private mortgage insurance (PMI). PMI protects the lender in the event that you default on your loan.
When you close, your lender may require you to pay your first month’s PMI fee. The actual amount you’ll pay for PMI is determined by your lender, but usually, homeowners pay $30 to $70 per month for each $100,000 borrowed.
You can also pay for part or all of a PMI coverage upfront at closing with a traditional loan, resulting in lower or no monthly mortgage insurance rates.
Unless you put down 10% or more, an FHA loan will need an upfront mortgage insurance premium as well as a monthly MIP tax for the life of the loan. In that situation, MIP is removed after 11 years. USDA loans have an upfront guarantee cost and a yearly guarantee fee, which work similarly to PMI/MIP.
Property taxes are levied by your local government in return for public services. These taxes help to pay for important institutions like public schools, roads, and fire departments. The amount of property taxes you will pay is determined by where you reside and the value of your home.
At closing, your lender may demand you to pay up to a year’s worth of property taxes. Using public documents and the appraised value, you may calculate your property taxes.
If you’re purchasing a home from a family member or friend, you should inquire about the proportion of property taxes they paid last year. This will provide you with the most accurate estimate of how much you will owe in property tax closing expenses.
In certain states, a land survey is required before completing a house transaction. A survey charge is paid to the surveyor who verifies and confirms your property boundaries before closing.
Your land survey should cost between $400 and $1,000. You may have to spend extra if you are purchasing a large property or one with unusual boundary lines.
Transfer taxes are paid to your local government in exchange for your home’s title being updated and transferred to you. This cost, like most other sorts of local taxes, will vary based on where you live.
Ask The Seller To Contribute
If you live in a buyer’s market, your seller may be eager to assist you with closing fees. If this is the case, it may be a win-win situation for both you and the seller: you get to pay less at the closing table, and your seller gets a quicker house sale. Check to see how much your seller can donate based on your loan type. Then, make a concession request.
Be careful that if market conditions favor the seller, asking for too many concessions may result in your offer being rejected.
You may be able to roll your closing expenses into your loan, depending on your lender and financial situation. If you do not pay the closing fees immediately, you will pay more in interest over time. Rather than including those charges in your mortgage, ask whether the seller is prepared to pay a portion of the closing costs to lower your upfront expenditures.
Closing charges are fees paid to your lender after you complete your loan. Closing expenses on a mortgage loan are typically 3% to 6% of the loan balance. Common closing costs include appraisal fees, attorney’s fees, and inspection fees.
The particular closing costs you’ll pay are determined by the sort of loan you have, the value of the property, and the state’s laws. Depending on the sales agreement, sellers may also need to pay for closing charges.
Negotiating with your lender may allow you to save money on closing expenses. You might also ask your seller to pay a part of your closing fees or use financing with no closing charges. In addition to your finances, go over everything you’ll need to bring to the closing.