What Are Closing Costs on a House?
When you purchase a house, your down payment should not be the only item you bring. In exchange for loan services, closing costs are an expense you have to pay your lender. So, what are closing costs on a house?
First-time buyers often underestimate the amount they will need to cover closing costs. There are many ways you can lower the amount that you will pay.
It can be difficult to understand closing costs. This article will give you a general overview of closing costs, so you can make an informed decision before finalizing your loan. You’ll be able to reduce the amount you pay by following these tips.
These are the processing fees that you pay your lender for closing costs. These fees are charged by lenders to create your loan. These fees cover your appraisal of your house and searches for your title. The type of loan and your location will determine the closing cost you need.
The closing costs of a home can amount to 3–6% of its price. If you get a $200,000 mortgage, closing costs can be as high as $6,000 to $12,000.
Your down payment is not included in closing costs, but they can be negotiable. Your closing costs could be covered by the seller in part or full. Be aware, however, that the market in which you are selling can have a significant impact on your negotiation power.
Buyers and sellers both pay the closing costs. The buyer typically pays the majority of these costs. Seller concessions are a way to negotiate with the seller for a reduction in closing costs. If you are worried about not being able to raise the funds you need, seller concessions may be a great option. Limits apply to the amounts sellers may offer towards closing costs. The maximum amount that sellers can contribute to closing costs is based on the mortgage value. This varies depending upon loan type and occupancy. Below is a breakdown of this:
Here is the breakdown of seller concessions for conventional loans. This percentage is calculated based on either the appraised or purchase price.
FHA loans can be much simpler. The contribution limit for FHA loans is 6%, based on either the appraised or purchase price.
There are a few different rules for VA loan sellers’ concessions depending on the application. You can use up to 4% of your purchase price, appraised value, or any other lower amount for escrow accounts. Prepaid taxes and homeowners insurance are also acceptable.
A seller may contribute unlimited funds to cover things such as discount points and origination costs.
Be aware that seller concessions on things such as jumbo loans can vary from one lender to the next.
This is how it works in practice. Consider if you are looking for a conventional loan of $200,000. The seller can only provide a maximum contribution of 3% (or $6,000), towards your closing costs if it is a conventional loan. The seller cannot contribute more than 100% of closing cost value if your closing costs are less than 3%. If your closing costs for the same loan amount to $2,500, then the seller cannot offer more than $2,500. This helps prevent fraud.
Closing costs will vary from one buyer to the next. Depending on your situation, there may be additional costs that are required by the lender, others that are mandated by government regulations, and some which are optional. The cost of the loan will vary depending on your location, which lender you use, and what kind you choose.
Your lender will send you your Closing Disclosure at least three business days prior to your meeting. It will include all closing costs you have to pay and the amount you owe. Here are some common closing costs that you may see in your disclosure.
To process your loan application, some lenders may charge an application fee. The fee can vary from lender to lender, but it could be as high as $500. It can be an additional fee or a deposit that will be applied to other closing costs. Even if your application is rejected, the fee will not be refunded.
An appraisal will be ordered by your lender through an independent appraisal management company. The professional appraiser will inspect your house and estimate the value of your property. The appraiser will also perform basic safety checks to ensure that the property is ready for occupancy. Because they determine the maximum amount of money you can borrow to purchase a property, appraisals are very important. You won’t pay too much for the property. Appraisal fees are usually between $300-$600 but maybe more.
You can’t get a loan for housing in certain states without the assistance of an attorney. The cost to have a realty attorney handle your closings and prepare paperwork for the title transfer is covered by attorney fees. The cost of a real estate attorney depends on the state you live in and what your local rate is.
The escrow company, attorney, or person who conducted your closing meeting receives the closing fee. Every closing must be signed off by an attorney in certain states. The costs of closings vary depending upon the state you live in and whether or not an attorney is required to attend.
Transport costs for mortgage documents are covered by courier fees. If your lender charges courier fees, you can expect to pay about $30.
The cost to pull your credit reports and look at your credit scores is covered by credit reporting fees. Credit reporting fees average $25.
You can pay upfront money to your lender to lower your interest rate. Lenders also allow you to buy discount points, which is basically buying interest down over the term of your loan. A discount point is 1% of the loan amount.
One point would cost $1,000 if you have a $100,000 mortgage. A point will cost you $2,000. For a loan of $200,000, it costs $1,000. Discount points, unlike other fees, are not mandatory.
Sometimes called reserve fees, prepaid or escrow, escrow money is reserved for homeowners insurance, property taxes, and premiums. The lender will keep your escrow money in a separate account. Your regular mortgage payments will include escrow payments. The lender uses these funds to pay you.
Your lender may require that you pay a set amount of monthly expenses to an escrow account at closing. Although the exact number depends on your lender’s policy, most buyers will put in 2 months worth of expenses when closing.
You will need to pay an upfront mortgage premium if you get an FHA loan. Current MIP rates are 1.75% on your base loan amount.
If you take out $100,000 in loans to purchase your house, the MIP at closing would be $1,750. The upfront payment you make is independent of the monthly MIP which ranges between 0.45% and 1.05%.
A flood certificate may be required if your property is located in a floodplain. The Federal Emergency Management Agency receives this money to help them plan for emergency situations and target high-risk areas. The closing cost applies only if the house is in flood-prone areas or you.
The homeowners association fee for transfer covers costs associated with moving HOA fees from seller to buyer. This fee ensures the seller pays their HOA fees on time. You will also receive a copy of the payment schedule and dues of your association, as well as financial statements.
Usually, this expense is covered by the seller. If you are buying in an extremely competitive market or agree to all closing costs, however, it may be necessary to pay your transfer fee.
Your HOA policies will determine the amount that you pay to transfer. This fee is not payable if you don’t live in an HOA.
You can get homeowners insurance to protect your property in the event of a home fire or other damage. To cover any damage, most mortgage lenders will require homeowners insurance to be included in your loan. If someone is injured or damages your property, you have the option to get protection for your contents and liability coverage.
A lot of lenders will require that you pay for one year’s worth of homeowners insurance when closing. For every $100,000 of home value, you can expect to pay $35 per month.
If you purchase a $200,000 home, homeowners insurance will likely cost you about $70 per month. Your lender may require that you pay $840 to an escrow account at closing.
The cost to process and underwrite your loan’s loan origination fee is covered by the lender. In exchange for your loan underwriting and loan documentation, this fee is paid to the lender. Origination fees will cost you about 1% of the loan value. This will be added to the mortgage discount points and shown under Origination Fees in your Loan Estimate.
Lender’s insurance covers title damage and reimburses you if your house is lost due to title claims. You only have to pay the lender’s insurance once, unlike other forms of insurance.
Lead paint might be present in homes built prior to 1979. Children and adults living in homes with lead-based paint are at significant risk of developing serious health problems.
The fee includes a lead test in your home. A lead-based inspection of the home will cost you around $300
Although owner’s title insurance can be optional, it is available in many situations. If a former owner brings a suit against you, a title insurance company can cover you.
Let’s suppose, for example, that ten years later, there is no lien on your title. Your title company will pay you the cost of your policy. The average cost of title insurance is 0.5 to 1% of its purchase price
Some states require that you have a pest inspection done before closing on your loan. If you are buying a house with a VA loan, pest inspections may be required. If the appraiser believes there are problems, it may also be necessary for any other loan.
An average pest inspection will cost around $100. This may depend on whether the seller, buyer, or lender covers the cost.
The lender may ask that you pay interest on any loan from close to the due date for your first mortgage payment. Your closing date and the loan amount will determine the amount of interest that you pay.
A conventional loan allows you to purchase a PMI insurance policy at closing. This will allow for lower monthly mortgage insurance fees.
FHA loans come with an upfront premium for mortgage insurance and a monthly MIP fee. This is unless there’s a 10% downpayment. MIP is eliminated in this case after eleven years. USDA loans come with an upfront guarantee fee as well as an annual guarantee fee. These fees work in the same way that PMI/MIP. This is a general recommendation, Rocket Mortgage(r), does not offer USDA loans.
In exchange for access to public services, property taxes is a fee you pay your local government. Property taxes are used to fund public services such as roads, schools, and fire departments. The location you live in and the value of your property will determine how much you pay in property tax.
You might be required by your lender to pay property taxes dues up to one year after closing. Your appraisal value and public records can be used to estimate the property tax dues.
Ask your family members or friends what they have paid in property taxes for the home you are buying. You will get a better estimate of your property tax closing costs.
You might be charged a fee by some lenders to lock your interest rate during the mortgage preapproval process and closing. When you lock your rate, it is usually 0.25 to 0.50% of the loan amount. Depending on how long the lock is, some lenders will offer the service free of charge.
To update public land ownership records, a recording fee must be paid to the local county or city government. This will cost you approximately $125.
You may need a survey in some states before you are able to sell your home. The survey company will verify and confirm your property lines prior to your closing.
Your land survey will cost you $300 to $950. If you are buying large properties or with unique boundary lines, your land survey may cost more.
It covers the costs of hiring an expert to check that you have correctly calculated your property taxes. If you have missed any property taxes, the company will notify your lender. The amount of the fee depends on your location and what company you use.
Searches for title claims will reveal any claims against the property that you are looking to purchase. The seller may not technically be the owner of the property if they have liens, bankruptcy, or are unable to pay back taxes.
Title insurance companies do the search for titles in all states. However, laws in some states require that title searches be handled by real estate lawyers. You can expect to pay between $200 and $400 for your title search.
In exchange for your property’s title being updated and transferred to you, transfer taxes are paid to the local government. This fee, like many other types of local taxes, will differ depending on your location.
In exchange for verifying the loan documentation, your underwriting fee is paid to your lender. Your loan could have up to $795 of underwriting fees.
If you purchase a VA home loan, there is a closing fee. The VA funding fee is used to cover administrative expenses for the VA loan program. Based on your down payment, whether you are purchasing or refinancing, and whether or not it is your first or second use of VA benefits, the amount of the VA funding fee will vary.
If you pay less than 5% down on your first VA loan, the VA funding fee equals 2.3% of your total loan amount or 3.6% for subsequent uses. Your fee will be 1.65% if you pay a 5% deposit, while a 10% downpayment will lower your fee by 1.4%. These two fees are identical, regardless of whether you’re doing it for the first or 10th time.
Refinances from other types of loans into VA loans are subject to a 2.3% funding fee if you’re the first user and 3.6% for each subsequent one. VA Streamlines, also known as Interest Rate Reduction Loans or IRRRLs, have a 0.5% financing fee.
If you are receiving VA disability, or if your spouse died in the line of duty or from a service-related injury, there is an exemption to the funding fee. You are exempt if you are a Purple Heart recipient who is serving active duty.