A common question that I’m asked when starting the RE buying process with clients is what should I budget for my closings costs?
Home buyers can estimate between 2-5% percent of the purchase price of their home in closing fees. Typically, it’s a several thousand dollar expense. On average, I see between $2,000-$4,500. However, these fees can be negotiated by your realtor in a purchase contract. Depending on the condition of the home and the RE market, a request for seller compensation is not uncommon. A few thousand dollar coverage request to complete the transaction can be made.
Your lender will be able to give you a good faith estimate early on in the loan process. Note that it is just an estimate and many of the fees listed can change. Here are the most common line items you can expect:
- Home Inspection: Verifies the condition of a property and identifies any repairs that may be needed before closing.
- Application Fee: Covers the cost for the lender to process your loan application. Not all lenders charge an application fee and it can often be negotiated.
- Origination Fee: Covers the lender’s administrative costs. It’s usually about 1 percent of the total loan but you can sometimes find mortgages with no origination fee.
- Appraisal: This cost is paid to the appraisal company and required by the lender to obtain a loan to confirm the fair market value of the purchase. The appraised value needs to be at or above the sale price.
- Credit Report: Your credit is pulled to get your credit history and score. Your credit score plays a big role in determining the interest rate and program eligibility.
- Underwriting Fee: Covers the cost of researching whether or not to approve you for the loan.
- Courier Fee: This covers the cost of transporting documents to complete the loan transaction as quickly as possible.
- Lender’s Policy Title Insurance: This is insurance to assure the lender that you own the home.
- Private Mortgage Insurance (PMI): If you’re making a down payment less than 20% of the home’s purchase price, PMI is a fee that is most likely applied. Additionally, you may be required to pay the first month’s PMI payment at closing.
Title company debits:
- Closing Fee or Escrow Fee: This is paid to the title company, escrow company or attorney for conducting the closing. The title company or escrow oversees the closing as an independent party in your home purchase.
- Title Company Title Search: This fee is paid to the title company for doing a thorough search of the property’s records. The title company researches the deed to your new home, ensuring that no one else has a claim to the property.
- Recording Fees: A fee charged by your local recording office, usually city or county, for the recording of public land records.
- Survey Fee: This fee goes to a survey company to verify all property lines and things like shared fences on the property.
- Transfer Taxes: This is the tax paid when the title passes from seller to buyer.
- Escrow Deposit for Property Taxes & Mortgage Insurance: Often you are asked to put down two to three months of property taxes and mortgage insurance payments at closing.
- Homeowners’ Insurance: This covers possible damages to your home. Your first year’s insurance is often paid at closing.
- Flood Insurance Evaluation: This is paid to a third party to determine if the property is located in a flood zone. If the property is found to be located within a flood zone, you will need to buy flood insurance.
- Owner’s Policy Title Insurance: This is an insurance policy that protects you in the event someone challenges your ownership of the home.
- Home Owners Association (HOA): Similar to an upfront payment for property taxes and PMI, a buyer living in an area with an HOA, may be required to pay several months’ upfront payment at closing.
In summary, there are a lot of different charges. Hire a realtor that is knowledgeable of the lending process and can talk through these details but most importantly, negotiate some or all coverage from the seller at closing.