Closing costs are the final pit stop on your journey to owning a house. Both the buyer and seller have to pay certain closing costs. As a buyer, it is essential to cater to the buyer closing costs before and at the time of the closure of the deal.
Key Takeaways
- Closing costs, also known as “settlement costs,” are the final expenses to complete the real estate transaction.
- Closing costs are separate from the price of the property.
- The seller and the buyer have to pay specific closing costs.
- The buyer can negotiate certain closing costs with the seller and the lender.
💰 CALCULATE YOUR CLOSING COSTS
What are Closing Costs?
Closing costs are a set of expenses that the seller and the buyer must pay to finalize the real estate transaction and transfer the ownership of the house.
Who Pays Closing Costs?
Both the seller and the buyer pay closing costs. Seller closing costs usually add up to 8%-10% of the sales price. On the other hand, buyers disburse 2%-6% of the purchase price to closing costs.
Some sellers may offer to pay buyer closing costs to improve the prospects of selling their home faster. They may also offer the same to buyers as an incentive to remove certain terms and contingencies from the sales contract.
Typical Closing Costs for Buyers
1. Application Fee
Application fee is an upfront fee lenders charge when you submit your loan application. It is a non-refundable charge. This means that you do not get this money back even if the loan application is rejected.
Application fee varies across mortgage lenders. Some lenders collect application fee as a deposit for closing costs, while others charge it as a separate fee.
Not all lenders charge an application fee.
2. Appraisal Fee
Usually, lenders hire an appraiser to determine the fair market value of the property the buyer wants to purchase. This helps them determine the loan amount and the loan-to-value ratio. The appraisal fee needs to be paid upfront as the appraiser needs to be compensated irrespective of whether the mortgage is approved.
Your real estate agent may include an appraisal contingency clause in the sales contract, especially if you need a mortgage. This gives you the right to walk away with your deposit if the appraised home value does not match the agreed-upon price.
3. Attorney Fee
Most buyers hire real estate attorneys when the real estate transaction is unusual or complex. Some instances of these are joint ownership of the house, private loans from family or friends, the presence of easements on the property, etc. However, you can hire an attorney even if your transaction is not unusual.
Real estate attorneys draft and review the purchase agreement and transfer of title on behalf of the lender while also offering advice on negotiations.
4. Closing Fee
A closing fee is paid to the escrow or settlement agent for the disbursement of funds between the seller and you. A settlement or closing agent can be a representative of a title company, an escrow agent, or a real estate attorney, as per law in the state where the property is located.
» What is Escrow: Learn more about what is an escrow and why it’s important
5. Courier Fee
The courier fee covers the cost of sending the documents to various parties. It is paid for by the buyer.
6. Credit Reporting Fee
Credit reporting fee is the cost of obtaining a credit report. The lender will use your credit report to estimate your ability to pay back the mortgage. The lender may request your credit report multiple times during the loan application process.
7. Discount Points/Mortgage Points
You can lower or buy down the interest rate on your mortgage by purchasing discount points from the lender. It is a prepaid interest you can pay upfront to lower your monthly mortgage payments.
The lender charges a fee to lower a set amount of interest rate called points. The value of discount points is based on the type of loan and prevailing mortgage rates and is decided by the lender. Generally, one discount point can be bought for a fee of 1% of the mortgage amount. Typically, lenders slash the interest rate by 0.25% for every discount point.
8. FHA Mortgage Insurance
All FHA loans require mortgage insurance. If you are opting for an FHA loan, you have to pay an upfront premium and an additional annual fee. The amount of these payments is based on the size of the loan.
FHA loans are designed to help moderate-income buyers with lower credit scores become homeowners. It is insured by the Federal Housing Administration (FHA).
9. Flood Certification Fee
If the property you intend to purchase is in or around a flood zone according to the Federal Emergency Management Agency (FEMA) maps, you must acquire a flood certification. The lender uses this report to determine if special flood insurance is required.
10. Homeowner’s Insurance
Lenders generally require you to purchase homeowner insurance before they finance the loan as it protects their investment. Homeowner’s insurance premiums are usually a part of the escrow funds.
11. Lead-based Paint Inspection
If you are purchasing a house built before 1978, you must get a lead-based paint inspection done. The cost of the inspection varies according to the size and location of the property.
According to the Residential Lead-Based Paint Hazard Reduction Act of 1992, you can conduct a lead-based paint within 10 days of signing the contract. If lead hazards are identified, you can cancel the contract without any penalty. Some buyers may waive off this right.
» Home Inspectors: Check out our rankings of the best home inspectors in the country
12. Lender’s Title Insurance
Mortgage lenders will almost always require you to purchase a lender’s title insurance. It protects them against loss over potential defects in the title or legal claims over the house. The lender’s title insurance must cover the full amount of the loan.
13. Loan Origination Fee
Once the mortgage has been approved, the lender charges an upfront loan origination fee to process the loan. The lender will inform you about this charge before the loan is processed.
14. Mortgage Escrow Account/ Impound Account
Lenders may establish a mortgage escrow account to pay the property tax and premiums homeowners insurance and mortgage insurance. These funds are deposited from your monthly mortgage payments. The mortgage escrow account is managed by a mortgage servicer who makes the payments on your behalf.
15. Private Mortgage Insurance
If you opt for a conventional loan and make a down payment of less than 20%, your lenders will require you to opt for Private Mortgage Insurance (PMI). The average rate of PMI for conventional loans ranges from 0.5%-1.86 % of the original loan amount.
You can choose to pay the complete or a partial amount of PMI upfront to lower your monthly mortgage payments.
16. Pest Inspection Fee
Pest inspection is usually required if the appraiser observes signs of structural damage due to pest infestation. Some lenders require an official report of inspection before approving the mortgage. In more than 31 U.S. states, a pest inspection is required before a VA loan can be closed.
17. Prepaid Daily Interest Charges
The monthly mortgage payment is due on the 1st of every month, starting 30 days after closing. However, the interest on the mortgage starts accumulating from the day of closing itself. You must pay the accrued interest from the closing day to the first mortgage payment as closing expenses. These are called prepaid daily interest charges.
So, for instance, if you purchase a house on the 4th of June, your first mortgage payment will be due on the 1st of August. You will have to pay the accrued interest on the loan from 4th June to 31st July at the time of closing.
18. Property Tax
Homeowners pay property tax to the local government. The amount of property tax is proportional to the market value of the house. Buyer property tax starts to accrue from the day of closing.
Lenders may require you to pay one year’s worth of property tax in advance at closing. These funds are usually collected and paid via the mortgage escrow account.
19. Rate Lock Fee
A rate lock fee is the cost of fixing the mortgage interest rate at a specific price for a set period. This keeps you safe from market fluctuations. Once the rate lock period expires, most lenders charge an additional fee to extend it.
While a rate lock can save a significant amount of money in interest, it is important to note that lenders can void the rate lock at any point if your debt-to-income ratio increases and your credit score declines.
20. Recording Fee
A recording fee is paid to the local government to register the change in ownership of a house or sale of a property in the public record. It also records mortgages and other liens against the house. The recording fee is usually charged by the county.
21. Survey Fee
A survey fee is paid to a professional surveyor who creates a drawing of the property highlighting its boundaries, easements, improvements, and the physical features of the land, like home elevation, etc. It will give a better idea of the property they are buying in an official and legal capacity. Survey reports are sometimes also required by title companies to issue lenders’ title insurance.
The survey fee depends on factors like the dimensions of the property, its terrain, and accessibility.
22. Tax Monitoring/Tax Status Research Fee
A tax monitoring fee is paid to a tax service agency that monitors if you are paying the property tax on time. The tax service agency will alert the lender in case you default. It is also sometimes referred to as a tax service fee.
Lenders opt for tax monitoring to prevent tax liens and protect their access to the property.
23. Title Search Fee
Title search fee is paid to a title agency to determine a property’s legal ownership by examining public records like deeds, tax liens, land records, court judgments, etc. The title search helps discover any liens or claims on the property that the seller may also be unaware of.
24. Transfer Tax
Transfer tax is levied by the municipality, county, or state to the transfer of ownership of the house from the seller to you. The tax amount is based on the market value of the property.
25. Underwriting Fee
Underwriting fee is a one-time fee charged by mortgage underwriters to evaluate and verify loan applications. Some lenders charge it in place of the originating fee, while others charge it in addition to the same.
26. VA Funding Fee
The VA funding fee is a one-time fee paid to the Department of Veteran Affairs (VA) that runs the VA loan program. The VA fee you have to pay depends on the down payment they make for a property. If you make a down payment of less than 5%, you have to pay a VA fee of 2.3% for your first home and 3.6% on any subsequent homes.
| Down Payment | VA Fee for 1st Loan | VA Fee for Subsequent Loans |
|---|---|---|
| Less than 5% | 2.3% | 3.6% |
| 5% or more | 1.65% | 1.65% |
| 10% or more | 1.4% | 1.4% |
Average Closing Costs for Buyers
How to Reduce Buyer Closing Costs?
1. Opt for a real estate broker who offers a rebate program
Some real estate brokers may offer you incentives like rebates that help lower closing costs and/or buy down the mortgage interest. Real estate agent services are free for buyers as sellers pay the real estate agent commission for both parties.
2. Compare lender mortgage rates
You can compare lenders to choose the one offering the best mortgage rates and benefits. If you have a preferred bank, you can also negotiate the mortgage rate with them. Further, if you have received an offer with a lower rate from a different lender, you can share it with the preferred bank and ask if they can match or beat it.
3. Compare loan estimate forms
Lenders are required to give you a loan estimate form within 3 days of completing the loan application. The document list all costs, including the loan amount, interest rate, and monthly payments. It also has a section called “services you can shop for,” where you can compare various lender-preferred vendors. Nonetheless, this does not mean that you cannot opt for independently chosen vendors.
However, it must be noted that independently choosing vendors carries the risk of increased closing costs if they increase their pricing before closing. Lender-provided vendors are not allowed to change their prices by more than 10% from the original quote.
4. Negotiate lender fee
As mentioned above, some lenders charge origination and/or underwriting fee. You can request the lender to waive these fees or negotiate a lower charge.
5. Close at the end of the month
By closing at the end of the month, you can save on the prepaid daily interest charges.
Here’s how you can calculate the prepaid daily interest savings:
Step 1: Multiply the loan amount by the interest rate. For instance, if the rate is 5 percent, multiply by .05. This will give the annual interest expense.
Step 2: Divide the annual interest expense by 360 to get the daily interest charge.
Step 3: Multiply the figure calculated in the previous step by the number of days left in the month plus the first day of the following month.
6. Opt for the no-closing cost option
You can avoid paying the buyer closing costs at the time of closing, especially if you are strapped for cash, by rolling these costs in the mortgage. However, lenders that offer this no-closing cost option charge a higher interest rate in exchange for it.
7. Minimize requests
Making demands can make the deal slow and troublesome for both parties. You should make minimal requests, so the seller is more willing to cover some of the buyer closing costs. If there are too many inconveniences, the seller may question your genuineness and feel a need to back out.
8. Make it quick and hassle-free
Most of the sellers aren’t happy dealing with the lengthy transaction. As much as possible, you must keep the transaction straightforward without beating the bush.
9. Ask the seller to cover closing costs
Depending on the market conditions, you can negotiate the deal with the seller by requesting them to cover some of the closing costs for buyers or offer credits towards closing costs. In fact, if the seller is selling their house as is, you can leverage that by asking them to cover your share of the closing costs.
Buyer Closing Costs Calculator
Closing costs for buyers vary heavily according to location and mortgage rates. Houzeo’s Closing Costs Calculator is a free tool that factors in these elements to help sellers and buyers estimate their closing costs. It shows the user a detailed list of itemized costs and also highlights junk costs that can be avoided.
Houzeo’s Closing Cost Calculator is frequently calibrated to give sellers and buyers the closest estimate according to market conditions.
» Closing Cost Calculator: Check your closing costs now!
How Should you Prepare for Closing Costs?
Closing can be an overwhelming process, however, if you prepare for it in advance, you can turn it into a smoother process. Here are some tips that can make closing less stressful for you.
1. Talk to your agent/ professional representative.
Your representative will try their best to ensure that the closing is successful. They will keep your best interests in mind, answer all your questions, and check the documents you are signing. They will also tell you about any special instructions they may have.
2. Go through your closing documents.
You will receive your closing documents three days before the day of closing. Review your closing documents thoroughly to develop an understanding of what you are about to sign. Further, you must ensure that there are no errors in the document, especially basic errors like names, spellings, numbers, etc.
3. Compare the closing fee with your loan estimate.
Your latest loan estimates and the closing fee mentioned in the disclosure should not have a lot of difference.
4. Collect your Photo ID documents
Identity verification is a part of the closing process. The closing agent will verify your identity with a government-issued ID like a driver’s license, military ID, state-issued ID, or passport. However, you must ensure that the document is valid and not expired.
If your spouse is to be a co-owner of the house and you don’t share the same last name, you must bring your marriage license to avoid delays.
The co-signer of the loan should also provide their ID to the closing.
5. Keep the payment ready
Your agent will tell you to either get a certified check or a cashier’s check. The lender will provide you with the final figure a few days before closing.
You may also receive instructions on how to wire the funds. You can verify these with the title company to avoid cyber scams.
If instead of loaning someone is gifting you funds for your down payment or closing costs you will have to provide a letter stating the same.
6. Proof of insurance
As mentioned earlier, the lender will ask you to opt for homeowner’s insurance. You will have to present proof of insurance at closing for verification. You can use the declarations page of the policy for this purpose.
7. Copy of contract with the seller
You must carry a copy of the contract you signed with the seller to review their responsibilities in the presence of the closing agent.
Conclusion
Developing an understanding of closing costs for buyers is important for you as it can help you estimate your financial affordability and discover where you can save. Ultimately, this can have a great impact on choosing the property you can purchase and the total amount you spend.
If you have not begun your real estate journey yet, opt for Houzeo. Houzeo.com, a tech company, provides an unbeatable combination of maximum savings, cutting-edge technology, and 5-star customer support. With its 100% virtual service, it helps home sellers list their property without any hassle from the comfort of their homes, while also allowing home buyers to explore properties and make offers online. Houzeo’s customer-centric approach, advanced technology, and flat fee packages make it an ideal choice for those looking to avoid paying high commissions and closing costs.
Frequently Asked Questions
1. Can closing costs change after closing disclosure?
Once the closing disclosure has been signed, it cannot be changed. Buyers must compare the closing disclosure with the initial loan estimate to identify any discrepancies.
2. Does closing disclosure mean loan is approved?
A closing disclosure is issued by the lender after the loan has been approved.
3. Can you switch lenders during underwriting?
Yes. However, this may cause delays in the closing process. It may also lead to additional costs if the lender requires a new appraisal and credit check.
4. How can I calculate closing costs for buyers?
Closing costs are a sum of specific settlement expenses. These vary according to the location, mortgage rates, and market conditions. Houzeo's closing cost estimaator is a free tool that buyers can use to get a close estimate of their settlement costs.
Related: how much are buyers closing costs, how much are closing costs for buyer, closing costs, home closing costs, closing costs on a house
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