Closing Costs
Closing costs
What Are Closing Costs On A House?
Closing costs are paid at closing for your mortgage. These costs arise through the process of creating your loan. Closing costs cover fees such as those associated with your home appraisal and searches on your home’s title. The specific closing costs you’ll need to pay depend on the type of loan you take and where you live.
How Much Are Closing Costs?
Closing costs are typically 3% – 6% of the loan amount. This means that if you take out a mortgage worth $200,000, you can expect to add closing costs of about $6,000 – $12,000 to your total cost.
Closing costs don’t include your down payment, but you may be able to negotiate them. Just be aware that your negotiating power can depend heavily on the type of market you find yourself in. Elow is a state-by-state breakdown of average closing costs, with and without transfer taxes. These averages are based on the average home price for each state.
Who Pays Closing Costs?
Both buyers and sellers pay closing costs. However, the buyer usually pays most of them. You can negotiate with a seller to help cover closing costs as part of their seller concessions. This can be extremely helpful in making your home purchase more affordable.Sellers have limits on the amount they can offer toward closing costs. The seller’s contribution can only reach a certain percentage of your mortgage value, which varies by loan type, occupancy and down payment. We’ve broken this down in the sections below.
Conventional Loans
Below is a breakdown of seller concessions limits for conventional loans. The percentage shown is based on the purchase price or appraised value, whichever is lower.
For primary residences:
- Down payments of 25% or more: 9%
- Down payments of 10% – 24.99%: 6%
- Down payments less than 10%: 3%
For second homes:
- Down payments of 25% or more: 9%
- Down payments of 10% – 24.99%: 6%
For an investment property, the maximum amount of seller concessions for any down payment is 2%.
FHA Loans
FHA loans are much more straightforward, and the contribution limit is 6% based on the lesser of the appraised value and the purchase price.
VA Loans
VA loan seller concessions follow a couple of different rules depending on what they’re being applied to. The full amount of seller concessions can be applied to discount points, origination costs, surveys, appraisals and credit report fees up to a limit of 4%.
The remaining concessions can be applied to prepaid escrows like taxes and insurance or the VA funding fee.
Jumbo Loans
Seller concessions for jumbo loans may vary by lender.
An Example Of Seller Concessions In Practice
How does this work in practice? Let’s say that you take out a conventional loan worth $200,000. If it’s a conventional loan and you made a down payment of less than 10%, the seller could only contribute a maximum of 3% ($6,000) toward your closing costs. If your closing costs come to less than 3% of your loan value, the seller can only contribute up to 100% of the closing cost value. This means that if your closing costs on the same loan equaled $2,500, the seller could only offer up to $2,500. These limitations help prevent fraud.
How Much Are Closing Costs For A Buyer?
Not every buyer will pay the same amount in closing costs. Some costs are lender requirements, some are government requirements, and others may depend on the situation. How much you’ll need to pay for will depend on where you live, your specific lender and the type of loan you take out.
At least 3 business days before you attend your closing meeting, your lender will give you a document called your Closing Disclosure. This will list out every closing cost you need to cover and how much you owe. Let’s look at some of the most common closing costs you might see on your disclosure.
Application Fee
Some lenders charge an application fee to process your loan request. This fee varies by lender but can be up to $500. This may be a separate fee or used as a deposit to be applied to other closing costs later.
Appraisal
Your lender will order an appraisal through a third-party appraisal management company that’ll send a professional appraiser to take a look at your home and determine how much your property is worth. They’ll do some basic safety checking to make sure the property is move-in ready. Appraisals are important because they set the value of the property, which in turn factors into the amount you can borrow. This also ensures you aren’t overpaying for a property. Appraisal fees are usually in the $300 to $600 range, but they can be higher.
Attorney Fees
In some states, you can’t close on a housing loan without an attorney. Attorney fees cover the cost of having a real estate attorney coordinate your closing and draw up paperwork for your title transfer. Real estate attorney charges depend on your state and local rates.
Closing Fee
Your closing fee goes to the escrow company or attorney who conducts your closing meeting. In some states, an attorney must sign off on every closing. These costs vary depending on your state and whether an attorney must attend your closing.
Courier Fee
Courier fees cover the cost of transporting mortgage documents. Expect to pay around $30 in courier fees if your lender charges them.
Credit Reporting Fee
Credit reporting fees cover the cost of pulling your credit report and looking at your credit score. Most credit reporting fees are between $10 and $100.
Discount Points
Lenders allow you to pay money upfront on your loan to reduce your interest rate by buying discount points (essentially, buying down your rate to save money in interest over time). One discount point equals 1% of your loan amount.
Your fees for any discount points will appear on your Loan Estimate under origination charges.
Escrow Funds
Sometimes referred to as reserve fees or prepaids, escrow funds hold reserved money for property taxes, homeowners insurance premiums and mortgage insurance. Your lender keeps your escrow funds in a special account and uses them to make payments on your behalf as part of your regular mortgage payment.At closing, your lender might require you to put a few months’ worth of expenses into an escrow account. Although the number of months depends on your lender, many buyers put down 2 months’ worth of expenses at closing.
FHA Mortgage Insurance
With an FHA lo an, you’ll need to pay a mortgage insurance premium upfront at closing. The current MIP rate is 1.75% of your base loan amount.
For example, if you borrow $100,000 to buy your home, your MIP due at closing is $1,750. This upfront payment is separate from your monthly MIP, which ranges from 0.15% to 0.75% of your loan value.
Flood Certification
You will likely need to pay $15 – $25 for a flood certification. This money goes to the Federal Emergency Management Agency, which uses the data to plan for emergencies and target high-risk zones. This closing cost only applies if you’re buying a house in a flood zone.
Homeowners Association Transfer Fee
If your property is located in a homeowners association, your homeowners association transfer fee covers the cost of moving HOA fees from the seller to the buyer. It ensures that the seller is up to date on their HOA dues and provides you a copy of the association’s payment and dues schedule as well as HOA financials.
Most of the time, the seller covers this cost. However, you might need to pay your transfer fee if you’re buying in a very competitive market.
The amount you’ll pay for your transfer depends on your HOA’s policies. If you live in an area without an HOA, you won’t pay this fee at all.
Homeowners Insurance
Homeowners Insurance is a type of protection that compensates you if your home gets damaged. Most mortgage lenders require you to have at least a certain amount of homeowners insurance as a condition of your loan to cover damage. You have the option of also getting protection for the contents within your home and liability coverage if someone gets injured on your property.
Many lenders require you to pay a year’s worth of homeowners insurance at closing. As a general rule, expect to pay about $50 a month for every $100,000 in home value.
For example, if you buy a home worth $200,000, you’ll likely pay about $100 per month for homeowners’ insurance. This means that your lender might require you to pay $1,200 into an escrow fund at closing.
Loan Origination Fee
Loan origination fees cover the cost of processing and underwriting your loan. These fees go to your lender in exchange for underwriting your loan and creating your loan paperwork. Expect to pay about 1% of your loan’s value in origination fees. Along with mortgage discount points, this will show up under origination charges on your Loan Estimate.
Lender’s Title Insurance
Lender’s title insurance protects the lender from loss if you lose your home to a title claim. Unlike with other types of insurance, you only need to pay for lender’s title insurance once at closing.
Lead-Based Paint Inspection
If you’re buying a home built before 1979, it might have lead paint. Lead-based paint poses a significant health risk to both adults and children living in a home. This fee covers a test for lead in the home. Expect to pay around $300 for a lead-based paint inspection.
Pest Inspection Fee
In some states, you’re required to get a pest inspection before closing on your loan. Pest inspections are also sometimes required if you’re buying a home with a VA loan. It may be required for other loans as well if the appraiser notes a problem.
Prepaid Daily Interest Charges
Your lender might ask you to pay upfront any interest that accrues on your loan between closing and the date of your first mortgage payment. The amount of interest you’ll accrue depends on your loan amount and interest rate as well as your closing date.
Private Mortgage Insurance (PMI)
Your lender will require you to pay private mortgage insurance if you put less than 20% down at closing on a conventional loan. PMI protects the lender if you default on your loan. Your lender might ask you to put down your first month’s PMI premium when you close. The exact amount you’ll pay for PMI depends on your lender, but most homeowners pay $30 – $70 each month for every $100,000 they borrow.
With a conventional loan, you also have the ability to pay for part or all of a PMI policy upfront at closing in order to have lower or no monthly fees for mortgage insurance. With an FHA loan, you’ll have an upfront mortgage insurance premium plus a monthly MIP fee for the life of the loan unless you make a down payment of 10% or more. In that case, MIP comes off after 11 years. USDA loans have an upfront guaranteed fee and an annual guaranteed fee that function a lot like PMI/MIP.
Property Tax
Property taxes are fees you pay to your local government in exchange for public services. Property taxes fund key institutions such as public schools, roads and fire departments. The amount you’ll pay in property taxes depends on where you live and your home’s value.
Your lender might require you to pay up to a year’s worth of property tax dues at closing. You can estimate your property taxes using public records and your appraisal value. If you’re buying a home from a family member or friend, you may want to ask them what percentage they paid in property taxes last year. This will give you the best estimate of how much you’ll owe in property tax closing costs.
Recording Fee
A recording fee of generally around $125 is paid to your local city or county government to update public land ownership records. Be aware that the price of this fee can vary by county.
Survey Fee
In some states, you must get a land survey before you can complete a home sale. A survey fee goes to the survey company that verifies and confirms your property lines before you close.
Tax Monitoring and Tax Status Research Fees
This covers the cost of hiring a company to verify that your calculated property taxes are correct. This company will also notify your lender if you miss any ongoing property taxes. The amount of this fee will vary depending on where you live and which company your lender uses.
Title Search Fees
Title searches look for claims on the property you want to buy. Liens, bankruptcies or unpaid back taxes can mean the seller doesn’t technically own the home they’re selling.
The title insurance company does the title search in most states, while laws dictate that real estate attorneys need to handle title searches in other states. Either way, expect to pay $200 – $400 for your title search.
Transfer Tax
Transfer taxes go to your local government in exchange for updating your home’s title and transferring it to you. Like most types of other local taxes, this fee will vary depending on where you live.
VA Funding Fee
You may need to pay a VA funding fee at closing if you buy a home using a VA loan. Your VA funding fee goes toward administrative costs for the VA loan program. The amount of the funding fee is based on the down payment, whether it’s a purchase or refinance, and whether it’s the first time you’ve used your VA benefits.
If you put down less than 5% on your loan and you’re a first-time VA user, your VA funding fee is equal to 2.15% of your total loan value. A 5% down payment lowers your fee to 1.5%, and a 10% down payment lowers your fee to 1.25%. The last two are the same regardless of whether it’s your first time or your 10th.
If you’re refinancing from a different type of loan into a VA loan, the funding fee is 2.15% if it’s your first use and 3.3% for a subsequent use. VA Streamlines (also called Interest Rate Reduction Refinance Loans, or IRRRLs) have a 0.5% funding fee.
The funding fee can be waived if you’re receiving VA disability or applying as a surviving spouse of a veteran who died while in service or as a result of a service-related disability. If you’re a purple Heart recipient serving in an active-duty capacity, you’re also exempt from the funding fee.
How To Calculate Closing Costs
Are you interested in seeing what you can expect with closing costs in the area where you live? Below, you can plug in the home’s purchase price and ZIP code, along with your down payment amount and credit score, to calculate your potential closing costs.
If you’re trying to calculate your closing costs by hand before having all of the real numbers to work with, remember: As a general rule of thumb, you can expect to pay about 3% – 6% of the loan amount in closing costs.
How To Reduce Closing Costs
Closing costs aren’t set in stone. Here are a few tips you can use to limit what you’ll pay at closing.
Shop Around for Lenders
As the buyer, you get to choose which mortgage company you work with. Don’t be afraid to take some time to shop around for lenders.
Contact a few competing loan providers and ask about the types of fees they charge. Choose a lender that offers low fees and competitive interest rates for lower overall closing costs.
Ask The Seller To Contribute
If you live in a buyer’s market, your seller might be willing to help you cover your closing costs. If so, this can be a win-win situation for you and the seller: You get to pay less at the closing table, and your seller gets a faster home sale. Make sure you understand how much your seller can contribute based on your loan type. Then, request a concession.
FAQs: Closing Costs
Here are some questions you may still have about closing costs.
How can I estimate closing costs?
Average closing costs are typically 3% – 6% of the loan balance, so you should prepare to include this into your budget when house hunting. Be sure to also ask your lender and real estate agent about your area’s property taxes and any additional fees required by the state.
When do I pay closing costs?
For most home loans, you’ll pay your closing costs when you attend your closing meeting. At closing, your lender accepts your down payment funds and anything you need to pay in closing costs.
How long does the closing process take?
How long it takes to close a house will depend on your organisation skills, your loan officer’s experience and the dependability of the seller. On average, though, the closing process takes about 30 – 45 days from the day you fill out your mortgage loan application.
Can my closing costs be wrapped into my mortgage loan?
Depending on your lender and your financial situation, you may be able to roll your closing costs into your loan. However, if you choose not to pay closing costs upfront, you’ll pay more in interest over time. Instead of rolling those costs into your mortgage, you can see if the seller is willing to pay a portion of the closing costs to reduce your upfront expenses.
