Let's Talk Closing Costs
Many buyer's have very little idea of what these costs entail and without understanding them sometimes are completely turned off from purchasing because of them! So let's do a little explaining as to why they are necessary and, also, how to keep these costs minimal. It's also important to note that, depending on the market, buyers can even ask the seller to assist in paying for them.
Closing costs include the myriad fees for the services and expenses required to finalize a mortgage and sale of a home. Most of the closing costs fall on the buyer side of the transaction, but the seller typically has to pay a few, too, such as the real estate agent’s commission. Average closing costs for the buyer run between about 2% and 5% of the loan amount. The most cost-effective way to cover your closing costs is to pay them out-of-pocket as a one-time expense. You may be able to finance them by folding them into the loan, if the lender allows, but then you’ll pay interest on those costs through the life of the mortgage.
Breakdown of Non-Recurring Closing Costs Associated with the Lender
Appraisal fee: cost varies. $300-$500. The property being appraised is collateral for your mortgage so the lender will want to verify that the property’s value is comparable to similar property based on recent sales in your area.
Credit Report: $7-$60. The lender naturally wants to verify your good (or acceptable) credit rating.
Flood certification fee: cost varies. $10-$30 The certification verifies whether your property is in a federally designated flood zone.
Lender’s Inspection fee: cost varies. Also know as a 442, this inspection is for newly constructed property to verify that construction is complete with carpeting and flooring installed.
Loan discount: cost varies. These are discount points, each equal to 1 percent of the loan amount, in addition to the loan origination fee. These are purchased at the buyer's option to lower their interest rate.
Loan Origination Fee: $800-$1200
Mortgage broker fee: They may also add in any broker processing fees in this area.
Tax service fee: $70-$80. This fee goes to an independent service that monitors your payment of property tax for the lender.
Other Lender Fees
Administration fee: cost varies. Either this or an underwriting fee will typically be charged.
Appraisal review fee: $75-$150. An appraisal review is usually done on higher-valued properties.
Document preparation: around $200. Even though lenders now can draw up their own documents without paying document preparation firms, you’ll still pay this.
Underwriting fee: $300-$350. This is the cost of putting the loan together.
Wire transfer fee: cost varies. This is the cost to transfer funds from one account to another.
Items required to be paid in advance
Homeowner’s insurance: cost varies. You are usually required to pay the entire first year’s insurance premiums at closing.
Mortgage insurance: cost varies. Some first-time homebuyer programs still require the first year mortgage insurance premium to be paid in advance.
Pre-paid interest: cost varies. This is the interest that will accumulate between the day of closing and the day the first payment is due, usually the first of the following month.
Up front mortgage insurance premium: cost varies. This is 2.25 percent of the loan balance, normally added to the balance of the loan. It is charged on FHA purchases of single family homes or planned unit developments.
VA funding fee: cost varies. This is paid to the Veterans Administration for guaranteeing your loan.
Reserves Deposited with Lender
Homeowners insurance impounds: cost varies. Lenders are allowed to keep two months’ worth of reserves in your impound account, so you will need to deposit two months’ worth of premiums to start it up.
Mortgage insurance impounds: cost varies. As noted above, most lenders allow mortgage insurance monthly, but you might have to put two months’ worth of premiums into an impound account for a reserve.
Property tax impounds: cost varies. Depending upon when taxes are due determines how much you will have to deposit towards taxes to start up your impound account. Usually two to four months worth.
Non-recurring closing costs
Closing/escrow/settlement fee: cost varies. Usually under $60 These are paid to the attorney/settlement agent administering your closing and preparing documents. This can be shopped.
Courier fee: cost varies. This is the charge for sending documents back and forth between lender and borrower.
Home inspection: cost varies per home sq footage. This is an optional, but recommended, cost usually covered out of pocket at time of inspection.
Home warranty: cost varies. Also optional, a home warranty usually covers such items as the major appliances, should they break down within a specific time. Often this is paid by the seller.
Homeowner’s association transfer fee: cost varies. This is the cost to transfer the membership from the seller to the buyer.
Loan tie-in fee: cost varies. Usually charged by the closing agent, this is for services they provide in dealing with the lender.
Notary fees: around $40. This is to make the document signatures legal.
Pest inspection: around $75. This inspection tests for pests and problems such as wood rot and water damage.
Recording fees: $40-$75. Charged to record documents with county government recorder.
Sub-escrow fee: cost varies. The title insurance company usually charges this for dealing with the closing agent.
Title insurance: cost varies. You pay this to make sure you have clear title to the property.
Not all of these costs apply to every buyer but, still, now that we've broken this down, this list inevitably seems daunting. Know that we are here to help save you every penny possible, in your best interest. Shopping for the best lender for your loan and best settlement agent to prepare everything is also quite essential. Good news is we've done that for you. We have an awesome network of lenders and agents that we can recommend to assist in getting the best deal done for you. Contact us with questions; we are available to discuss your purchasing options anytime, anywhere!