After finding their dream home and signing the purchase contract, most buyers feel on top of the world … until they see the Loan Estimate or preliminary closing statement (if buying in cash). What are all those charges? And is there any way around them? Did the closing costs for the buyer in particular catch you by surprise?
Closing costs refer to the cash required to complete your real estate purchase. Closing costs are not a part of the purchase price of the home; they are a separate collection of fees and charges required to officially administer the sale which are due, as the name suggests, on your closing date.
According to ClosingCorp, a national provider of closing data, Americans pay $5,749 (on average) in closing costs. However, that figure varies widely depending upon location and home price. For example, closing costs in the District of Columbia average $25,800, while buyers in Indiana pay closer to $1,909, on average.
As a rule of thumb, homebuyers can expect to pay between 2% and 5% of the purchase price in closing costs, with the bulk of that number going to fund title services, lending services, and certain taxes.
What does a buyer pay in closing costs?
McCoy says, “When I have a buyer write an offer, I do an estimate of closing costs as a service.”
But she’s quick to point out that many (not all!) of the costs can be variable based on a buyer’s preferences.
Here’s what you can expect and where you might find some wiggle room.
Without a mortgage
Some buyers think that paying with cash eliminates closing costs, but there are certain fees and prorations that will still be required at the table, with or without a mortgage loan.
Title review fee
The title agent reviews the deed and title for outstanding liens and claims, and they also verify that the seller really does own the house. This process can be extensive, and therefore it comes at a cost: usually around $200.
Some states charge property taxes for the future year, which means that a buyer would need to reimburse the seller for the portion of the year’s taxes for which the seller prepaid but will not own the property.
If you see property taxes due on your closing statement as a buyer, it will be expressed as a prorated number that divides the total amount in taxes that the seller has paid by the number of days in the tax year. You’ll be responsible for repaying the seller for taxes only for the number of days during the tax year that you’ll own the home.
Some property inspection fees may be due at closing; others are paid upfront to the inspector.
Keep track of which inspectors you pay on the spot and which will be charged later! These could include a basic home inspection, pest inspection, lead-based paint inspection, roof inspection, foundation inspection, and more, depending on what your home needs.
Transfer tax refers to the governmental fee for documenting a change in ownership. Not all states require a transfer tax, and those states that do impose the tax all use a slightly different formula to calculate it.
For example, Arizona charges a flat $2 fee, while parts of New York could see a 2.65% tax on the home price. Sometimes local tax stamps accompany the transfer tax, as well.
This transfer tax table can help as a baseline for calculating what you could owe, but check with your real estate agent for more pinpointed transfer tax calculations.
Some states require a buyer to have attorney representation, which means you’ll need to pay that attorney. This fee varies depending on the attorney, so shopping around is in your best interest. Attorney fees at closing can range between $400 to $1,500.
This may also be called the “escrow fee.” A closing or escrow fee is paid to the company that handles the money and title transfers along with the paperwork — usually, this is the title company.
This fee varies by company and locale; often, it’s based on a percentage of the home’s sales price rather than a flat fee. The seller and the buyer will often split this cost evenly.
Though you have the option to shop around for your best closing fee, your real estate agent will usually help guide you to their preferred local title or escrow company.
If your new community is governed by a homeowners association (HOA), then you may be subject to a transfer fee. This fee is separate from your yearly dues and is intended to cover the distribution of paperwork and the recording of documents by the HOA board or committee.
The fee can be drastically different from neighborhood to neighborhood, though some states put a cap on the allowed HOA transfer fee. Your real estate agent can obtain HOA transfer fee information for you.
Real estate agent commission
Real estate agent fees are typically paid by the seller, but in some multiple-bid negotiations, the commission might be taken on by the buyer.
Real estate agent commissions are typically between 5% and 6% of the sales price, split between the seller’s agent and the buyer’s agent.
Title insurance technically isn’t required if you don’t have a mortgage, but it’s highly recommended. It protects you from any future claims on your property that the title company might have missed during the title review. See below for more details.
With a mortgage
Helali says, “There are some things that a lender has zero control over, such as title fees and insurance.”
With that in mind, buyers who obtain a mortgage loan for their home will be responsible for all of the above closing costs (depending on their situation and location), as well as the following lender-specific closing costs, many of which can be different from lender to lender.
Sometimes (but not always) a lender will charge a fee to process your initial application. The application fee can run as high as $500 in some cases. Ask your loan officer about application fees before applying, and if you aren’t comfortable with the fee — which is often non-refundable — look for a lender that does not charge an application fee.
A lender will not issue a mortgage without a current survey to mark and clear the property’s boundaries. A survey costs around $500 on average, and some buyers might pay this directly to the survey company prior to closing.
Like the survey fee, a lender will not issue a mortgage without a verified appraisal to determine the property’s worth. Appraisals cost around $300 for the average single family home.
This fee covers the lender’s administrative costs in processing the loan. Origination fees are usually based on a percentage of the loan — between 0.5% and 1% is normal — though some lenders waive origination fees in exchange for higher interest rates.
Underwriting refers to the research process of determining if you are a good candidate for the loan. Underwriters check your credit, employment, and finances to determine the company’s risk in taking you on as a borrower, ultimately affecting your loan approval.
Sometimes underwriting fees are wrapped up in origination fees. When seen as a separate line item, underwriting fees can range between $400 and $900.
Flood determination fee
If your new home is located in or near a high-risk flood area, your lender may require a flood inspector to assess the need for flood insurance. However, usually the predetermined FEMA flood zone will suffice.
Rate lock fee
To lock in an interest rate between the time of pre-approval and closing, some lenders may charge a rate lock fee. If so, you can expect a one-time closing charge that costs around 0.5% (or less) of the loan.
Mortgage insurance (MI)
If you make a down payment that’s less than 20% of the purchase price, the lender will probably require you to pay mortgage insurance, which can cost between 0.5% and 1% of the loan amount; it’s calculated annually and built into the monthly mortgage payment. But your first payment will likely be due at closing.
A discount point is a one-time upfront fee that you pay to get a lower interest rate for the life of the mortgage.
Usually, one point costs the equivalent of 1% of the loan amount, and each point you buy typically reduces the interest rate by 0.25%. Most lenders limit the number of points you can buy. You and your lender will talk through points prior to closing.
Prepaid daily interest
Title insurance protects the buyer and their lender from future ownership issues, such as unknown liens, deed discrepancies, or unidentified heirs. A lender will likely require a title insurance policy that covers both buyer and lender.
The cost for title insurance varies based on the price and location of your home, but the national average runs around $1,400 for both buyer and lender coverage. In some states, title insurance is traditionally paid by the seller, so check with your real estate agent about local norms.
FHA or VA fees
If you obtain an FHA loan, you’ll be charged 1.75% of the loan amount for mortgage insurance, which might be due at closing or could be rolled into your monthly payments. For VA borrowers, there may be a funding fee due at closing, depending upon your military classification.
A minimal administrative fee charged by the government agency that officially records the mortgage and ownership. The recording fee ranges from $12 on the low end to the low $100s for larger and more complicated documentation.
The lender will run a credit report as part of the application process, and you should be given a copy. Credit reports cost around $30, more or less.
Often (but not always) a lender will require buyers to place an initial deposit into the homeowners insurance and property tax escrow account. If required, this deposit is usually equivalent to two months’ worth of escrow contributions.
Mortgage broker fee
Most of the time mortgage brokers are paid by the lender, but if you’ve worked with a buyer-paid broker, you may be on the hook for their fee at closing. Brokers typically charge between 0.5% and 2% of the loan amount. Before working with a mortgage broker, be sure to discuss who is responsible for their fee.
Can a buyer reduce their closing costs?
While closing costs are a necessary part of buying a home, there are a few ways to manage the financial burden.
Research your options
McCoy recommends that buyers shop around for the best rates on all homebuying services. From the lender to the inspections, asking upfront about the charges keeps you in control of your bottom line at closing.
Compare rates and fees for mortgages, inspections, and settlement agents if the company hasn’t already been chosen by the seller. Your Loan Estimates will have details on how much different lenders are charging you for the loan.
Close at the end of the month
An end-of-the-month closing date could reduce the amount of prepaid daily mortgage interest you’ll need to pay at closing. Your first mortgage payment usually won’t be due until at least a full month after your closing date.
You’ll pay prepaid interest from your closing date until the end of that month you close in. As such, if you close near the end of the month, you’ll usually only pay for a few days’ interest upfront.
Negotiate with the seller
During the offer or inspection stage, you may be able to appeal to the seller to contribute cash toward closing costs. If a house has been sitting on the market for a while, the seller may be motivated to help you out with closing costs in order to complete the sale.
But in hot sellers’ markets, this tactic is less likely to work. McCoy reminds her buyers that asking for closing costs comes right off the seller’s profits. “You’re probably going to lose out if another offer comes in and the buyer isn’t asking for closing costs.”
Go over fees with the lender
Three days following your loan application, the lender will give you a Loan Estimate, which breaks down your potential cash-to-close numbers. You’ll want to read through this document carefully, and ideally, compare it against other Loan Estimates.
Helali says, “When a buyer gets that Loan Estimate –– it doesn’t matter if it looks high or if it looks low –– it’s important to ask questions.” A proper comparison of rates depends on knowing how the loan originator put together the estimate.
At HomeLight Home Loans, Helali works off of a worst-case scenario for cost estimates that are variable in an effort to eliminate unpleasant surprises later. But not all mortgage companies follow that protocol, so a different estimate may appear much lower, when in reality, it’s not.
Look for and question unnecessary documentation fees. Ask them to explain any of the application fees, origination fees, underwriting fees, rate lock fees, and/or mortgage broker fees. Ask for clarity on mortgage insurance and discount points, and consult a financial advisor, if need be. If you don’t like all the fees you are going to pay, get loan estimates from other lenders and compare! (Fun fact: HomeLight Home Loans charges zero lender fees!)
If you’re really struggling to meet that cash-to-close number, talk with your lender about the possibility of rolling your closing costs into the loan, but beware that this may increase your interest rate.
Remember, your real estate agent and your loan officer are always able to help you decipher your closing costs. Rely on their experience if you run into any points of confusion.
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