Buying your first home is an exhilarating experience. Saving for a down payment is a monumental task, but many first-time buyers are thrown for a loop when they learn, for the first time, about closing costs.
Closing costs can add tens of thousands of dollars to your purchase – on top of your down payment, and usually out of pocket.
- What Are Closing Costs for Buyers?
- How to Estimate Your Closing Costs
- Can Closing Costs be Included in a Home Mortgage Loan?
- Can the Buyer and Seller Negotiate Closing Costs?
- Where do Closing Costs Go When Paid?
- What Fees and Services are Included in Closing Costs?
- Additional Closing Costs
- Have Questions? Ask Becky!
What Are Closing Costs for Buyers?
“Closing costs” is a term used to encompass the total amount due for all services and fees accrued during your real estate transaction, which can take up to 90 days.
You may think that the only people involved with your home purchase is you – the buyer, along with the seller and both of your agents.
But the truth is, once your home purchase is underway, a whole team of professionals kicks into gear to make sure all the proper procedures are met.
How to Estimate Your Closing Costs
Closing costs can amount to tens of thousands of dollars, so how do you know what you’ll need to budget?
In general, closing costs can range between one and eight percent of the home’s total value, but more realistically falls between two and five percent.
Figuring on the high end of five percent, a $300,000 property should produce closing costs at around $15,000.
When you apply for your home mortgage loan, within three days, your lender will provide you with a list of estimated closing costs.
Then, three days before closing, the lender provides a statement of actual costs, which doesn’t usually differ much from the original estimate.
Can Closing Costs be Included in a Home Mortgage Loan?
Most often, buyers are responsible for paying closing costs out-of-pocket at the closing table when the transaction is finalized. However, there are exceptions to the rule.
Some lenders are willing to roll your closing costs into your loan (at a price!), as well as first-time buyer programs or particular loans such as VA or FHA loans that ease the burden of closing costs.
Research lenders, loan types, and programs before you apply for your home mortgage loan. You’ll soon discover which lenders will or won’t include your closing costs in your mortgage.
Your real estate agent is a valuable resource with a wealth of knowledge about lenders, services, and closing costs. Talk with your agent in-depth about what you can expect to pay for closing costs.
Can the Buyer and Seller Negotiate Closing Costs?
There are situations in which the seller may be willing to pay a portion or all of your closing costs. This is particularly true in a buyer’s market where the current homeowners become more determined to sell.
However, in a seller’s market where the seller has multiple competitive offers, asking for help with closing costs could cost you the deal.
Discuss potential closing cost negotiations with your real estate agent, who can advise you on the best way to move forward with your offer.
Where do Closing Costs Go When Paid?
All of your paid closing costs are put in an escrow account.
At closing, an escrow agent takes the responsibility of dispersing those funds to the proper service providers and providing payment to the seller.
This is a much simpler option than having to cut a check for each service along the way.
What Fees and Services are Included in Closing Costs?
Let’s start with your lender as this is where a large chunk of closing costs are accrued.
An Origination fee, or application fee, is a charge for starting your application process.
Next, the underwriter, who handles processing the application, gathering documents, and creating the contract, also charges a fee.
You’ll pay for the cost of your credit report, which the bank obtains to verify your credit history.
If you’re assuming the seller’s mortgage, you’ll pay an assumption fee.
In some states, it’s required to have a real estate attorney. Even when it’s not needed, it’s a good practice to have reliable legal guidance through contracts.
Many financial institutions wire funds electronically, in which case there’s a wire transfer fee.
Your paperwork changes hands several times throughout your transaction, for which a courier is employed. You’ll pay that courier service as well.
The bank usually requires an escrow account, which is comparable to a temporary savings account wherein the bank holds funds for insurance and property taxes.
You’ll pay for not only the escrow account and escrow agent, but also a notary if one is required.
You may pay a rate lock fee if you’ve chosen a fixed interest rate, which ensures your price will not escalate.
When you apply for your home mortgage loan, you have the option to pre-pay some of your interest or purchase discount points. If you’ve chosen to do either, those funds will be due at closing as well.
You’ll be required to pay homeowner’s insurance in advance, which goes into your escrow account and paid for you through your mortgage payment.
Your property taxes may also be paid into your escrow account from which that bill is automatically withdrawn.
Your lender may require private mortgage insurance if you’re unable to repay your loan.
Title insurance protects both the bank and the buyer in case problems arise with the title after closing.
Homeowners insurance covers specific things, but not all conditions fall under that umbrella. You may also be required to have an additional flood or fire insurance policy.
Carefully review your closing costs estimate from your lender. If you have questions about items listed in the closing costs, ask your lender and/or your real estate agent.
Additional Closing Costs
Your bank has additional requirements before agreeing to loan hundreds of thousands of dollars.
The house you’re buying will be appraised, inspected, and possibly surveyed.
A third-party expert appraiser conducts the appraisal. The appraiser works with a comprehensive market report, or CMA, to determine fair market value for the area.
Next, he or she will look inside and outside of the property to assess its age and condition. The appraisal assures the bank that the house that you’re purchasing is worth the purchase price.
An inspector investigates the integrity of the structure and major systems such as heating and air, plumbing, electrical, the foundation, and the roof. Additionally, he or she inspects for pests such as termites that can cause the house to deteriorate from the inside out.
If property lines are in question, a surveyor is called in to survey the land to determine boundaries and may also assess soil quality.
If you weren’t aware of closing costs and didn’t see them coming, you could find yourself devastated when you realize that you are thousands, possibly tens of thousands, of dollars shy, and you might not be able to move forward.
Shop lenders to find one whose terms, conditions, and rates match your criteria.
Just like you planned and prepared for your down payment, you’ve also got to prepare and save for your closing costs.
Talk with your real estate agent from the beginning about what closing costs may be included in your home purchase.
Have Questions? Ask Becky!
Give Becky Nay a call today at 801-573-2077 to learn more about local areas, discuss selling a house, or tour available homes for sale.