What are closing costs, and how much will they cost me? These are two common questions new home buyers may find themselves asking. Closing costs are the fees paid to third parties that help facilitate the sale of a home, and they vary widely by location. You can estimate typical closing costs at 2% to 7% of the home’s purchase price. For example, on a $250,000 home, your closing costs would amount to anywhere from $5,000 to $17,500. The variances in closing costs are based on: location, property, and loan type.
🧐 Who pays closing costs?
Home buyers will typically cover the bulk of closing fees since most fees are associated with the mortgage. However, in some instances, the seller may agree to pay all or part of the fees. Keep in mind that buyers may request assistance from the seller to cover some closing costs, but the seller is under no obligation to agree. If the seller agrees to do so, they may counter with a higher selling price. Read carefully before you sign anything – all costs and accountable parties will be detailed in your paperwork.
💲 Administrative Fees
- Application Fee: This fee covers the cost for the lender to process your application.
- Attorney Fee: This pays for an attorney to review the closing documents on behalf of the buyer or the lender. This is not required in all states.
- Origination Fee: This covers the lender’s administrative costs.
- Recording Fees: A fee charged by your local recording office, usually city or county, for the recording of public land records.
- Transfer Taxes: This is the tax paid when the title passes from seller to buyer.
- Underwriting Fee: This also goes to your lender, covering the cost of researching whether to approve you for the loan.
- VA Funding Fee: If you have a VA loan, you may be required to pay a VA funding fee at closing.
💵 Insurance Costs
- Flood Determination Life of Loan Coverage: This is paid to a third party to determine if the property is located in a flood zone. The insurance, of course, is paid separately.
- Homeowners’ Insurance: This covers possible damages to your home. Your first year’s insurance is often paid at closing.
- Lender’s Policy Title Insurance: This is insurance to assure the lender that you own the home, and it protects the lender if there is a problem with the title.
- Owner’s Policy Title Insurance: This is an insurance policy that protects you in the event someone challenges your ownership of the home.
- Private Mortgage Insurance (PMI): If you’re making a down payment that’s less than 20% of the home’s purchase price, chances are you’ll be required to pay PMI.
✍️ Paperwork and Title Fees
- Closing Fee or Escrow Fee: This is paid to the title company, escrow company or attorney for conducting the closing.
- Credit Report: Your credit score plays a big role in determining the interest rate you’ll get on your loan.
- Escrow Deposit for Property Taxes & Mortgage Insurance: Often you are asked to put down two months of property tax and mortgage insurance payments at closing.
- Title Company Title Search or Exam Fee: This fee is paid to the title company for doing a thorough search of the property’s records.
- Prepaid Interest: Most lenders will ask you to prepay any interest that will accrue between closing and the date of your first mortgage payment.
- Property Tax: Typically, lenders will want any taxes due within 60 days of purchase by the loan servicer to be paid at closing.
📝 Inspections & Appraisals
- Appraisal: This is paid to the appraisal company to confirm the fair market value of the home.
- Home Inspection: You will likely get your own home inspection to verify the condition of a property and to check for home repairs that may be needed before closing.
- Pest Inspection: This fee covers the cost to inspect for termites or dry rot, which is required in some states and required for government loans.
- Survey Fee: This fee goes to a survey company to verify all property lines and things like shared fences on the property.
While you can be assured that you will be responsible for some of the items on this list, not all of them may be included. The reason for the disparity in closing costs boils down to the fact that different states and municipalities have different fees and legal requirements for the sale of a home.