What are the closing costs?
When the purchase of the house is finalized, the borrower has to pay a certain amount of fees and charges to the lender which are called closing costs. Closing costs are basically the processing fee of the mortgage. As closing costs, you will need to pay a variety of costs such as appraisal fee, mortgage insurance, homeowner’s insurance, property taxes, attorney’s fee, etc. Fees and charges vary from lender to lender.
On the other hand, home sellers also have to pay ownership transfer fees and commissions to real estate agents.
How much are closing costs?
The average closing costs for a home buyer are 2% to 5% of the value of the home. This means that if you borrow $200,000, your closing costs are expected to be $4,000 to $10,000.
Some lenders will give you the opportunity to pay closing costs by folding it into the loan. But you should pay the whole closing costs at once. Because if you want to repay these costs with the loan, you have to pay extra interest for this through the whole mortgage life.
However, closing costs vary from lender to lender. You can negotiate with lenders to reduce these costs.
There are some states and counties that offer low-interest loans to first-time home buyers or offer some discounts on closing costs. You can seek these offers.
Closing Costs for Buyers
Home buyers have to pay the largest part of the closing costs.
Closing costs vary from lender to lender. However, not all expenses are borne by the lender, some costs go to the government custody and some are optional.
The amount you pay will depend on the location of the home you are buying, the lender, and the type of loan you are taking out.
The closing costs that a buyer has to pay are discussed below –
You will have to pay the application fee when you apply for a loan from a lender. This is also called the application processing fee. After receiving your new loan request the lender has to spend some money to process your application, includes costs such as checking your credit rating and administrative expenses. It is seen that some lenders charge lower application fee and some charge lower.
Before granting a home loan, lenders evaluate the worth of the home of the loan applicant through a third-party appraisal management company. This allows the lender to verify the actual value of the borrower’s home and make an easy decision on whether to lend or not. Appraisal fees range from $300 to $500.
Loan origination fee
The lender will charge you a loan origination fee as an underwriting or loan processing or administrative fee. You will need to pay this fee to cover the cost associated with evaluating your application and prepare a variety of documents. Usually 1% of the total loan value has to be paid as the origination fee. This means that if you borrow $100,000, you will have to pay a $1,000 origination fee.
Home inspection fee
If you want to borrow a government-backed loan, such as a USDA loan or FHA loan, lenders may want to inspect the condition of the home that you are going to buy.
The lender needs to make sure the home you are going to buy is livable by inspecting the house. After inspecting, If they find any problem of the home, you can negotiate with the seller to buy the house at a lower price. Home inspection fees are usually between $300 and $500.
In some states, if you want to borrow for buying a home, you need to ensure the presence of a real estate attorney at closing. They will help during the closing and draw up paperwork for the transfer of ownership of your home. You can’t close on a housing without a real estate attorney. Each state imposes a different type of attorney fee.
Mortgage documents have to be sent to different third parties which incurs some transportation cost for of the lender. Due to which the lender imposes courier fee on the home buyer. You are required to pay $20-$30 for courier fees.
If you want to buy a house whose mortgage has not been completely paid off to the bank yet. You have the option to take over the remaining balance of the loan from the seller. That time you need to pay assumption fee.
Credit Monitoring Fee
When you apply for a loan, the lender has to check your credit history and credit score before processing the loan application. The Lender need to check if your credit score is good enough to get a loan. For this you have to pay some fee. The fee is around $25.
Prepaid interest is another closing cost that a home buyer has to pay to lender. You are required to pay the interest that accrues on the loan between the loan settlement date and the first monthly payment since you applied for a loan.
Discount points are also called mortgage points. Discount Points are fees that borrow has to pay to the lender in exchange for a reduction in interest rates. This means that you have reduced the interest rate in exchange for the fee. Discount points costs 1% of your mortgage amount.
However, if you are planning stay at home for a short time, paying points will not make sense to you, only those who will stay at home for a long time; this fee is effective for them.
Mortgage broker Charge
If you take the help of a mortgage broker to get a mortgage, you will have to pay a charge to the mortgage broker. Each broker demands a different fee. However, the general fee is a maximum of 2.75% of the total mortgage.
If you make a down payment of less than 20% of the total loan, you will need to pay mortgage insurance.
Lenders are actually protected through mortgage insurance. This means that if the borrower fails to repay the loan, they will be able to cover the loss through mortgage insurance. At present MIP is 0.55% to 2.25% of the total loan.
There are some lenders who want the first year insurance premium upfront, while there are some lenders who ask you to pay full amount mortgage insurance premium at once.
FHA, VA and USDA fees
If you get an FHA loan, you will need to pay FHA mortgage insurance. Under the terms of the FHA loan, you will need to pay an insurance premium upfront 1.75% of the total loan in addition to the monthly payment.
And if you have a VA loan that is guaranteed by the Department of Veterans Affairs, then you have to pay the guarantee fee. The guarantee fee for a VA loan is usually 1.25% to 3.3% of the total loan. If the down payment is more then the fee is less and if the down payment is less then the fee will be more.
If you have a USDA loan that is guaranteed by the U.S. Department of Agriculture, you will have to pay 1 percent of the total loan as guarantee fee.
Flood Certification Fee
If you are going to buy a house in a place that is flooded almost all the time then you have to pay flood certification Fee. This fee is paid to the Federal Emergency Management Agency. This fee amounts to $15 – $25. As a result, the Federal Emergency Management Agency will store your home data on their servers and they will come to your aid in the time of a disaster.
Most lenders include property tax when settling monthly mortgage payments. So you have to pay property tax on the monthly payment. You will also need to pay a two-month city and county property tax at closing.
Homeowners Association Transfer Fee
You may have to pay a homeowners association transfer fee when you purchase a home. But most of the sellers don’t charge this cost. However, this fee does not apply to all areas. This fee is levied only in areas covered by HOA.
If any vandalism occurs to your home, you can compensate for the damage to your home through homeowners insurance. That’s why many lenders want you to pay one year of homeowners insurance at closing. As a general rule, if the house is worth $100,000, you have to pay $35 per month and $420 for a year.
Title search fee
Through the title search lender verifies the seller’s home ownership. If this real estate has no record on database then lender assign third party to investigate title search of the property. They check different issues such as whether anyone has a claim against the property. Since the third party has to give huge effort to do this, the amount of fee is also high. Most lenders charge around $200 as a title search fee.
Lender’s title insurance
Lender’s title insurance will protects lenders from home ownership problems. Many lenders ask the borrower to pay title insurance to protect themselves from possible losses if someone else claims ownership of the home in the future.
Owner’s title insurance
Owner’s title insurance is an optional cost. This insurance will protect you in the future if the previous home owner claims for ownership of the home. According to the American Land Title Association, the cost of owner’s title insurance ranges from .5% to 1% of the total loan.
Closing Costs for Sellers
Attorney’s Fees are not usually paid by the seller. But in some cases it is seen that the seller pays Attorney’s Fees. Basically, it depends on the will of the seller.
Escrow accounts provide benefits to both the seller and the buyer. This ensures the security of the fund. So many sellers carry 50 percent of the Escrow fee.
All Homeowners Association Fees must be paid up by the seller until the date of closing. After closing, the buyer of the house will be responsible to pay HOA fees.
Real Estate Agent Commission
Usually both buyers and sellers hire real estate agents. However, sellers pay commissions to real estate agents. Usually real estate agent charges 5 percent of the total value of the house. This commission is shared by the agent of both the buyer and the seller.
If the buyer sends an offer letter to the seller to buy the house without an agent, the buyer can get some discount on the price of the house. Because in this case the agent cost of the home seller will be saved.
Recording Fees and Transfer Taxes
The local government charges a fee when the ownership of a home changes. These fees include recording fees and transfer taxes. The seller has to pay these fees.
I have discussed different types of closing fees above. However, not all fees apply to you. You can find out from the lender about the fees that apply to you.
You will receive an estimate of the loan from the lender a few days after the loan application. There will be mention of all fees, interest rates and other expenses. Then you can check everything.
You will then be sent a Closing Disclosure three days before the loan settlement. It will confirm everything about loan estimate.