Closing costs are miscellaneous fees charged by those involved with the home sale (such as your lender for processing the loan, the title company for handling the paperwork, a land surveyor, local government offices for recording the deed,etc.). The average closing costs percentage is usually about 2-5% of the purchase price (e.g., ~$4500 on a $180,000 home), but 1-8% is not uncommon. And to be clear, nobody chooses a specific percentage number—the closing costs will just happen to add up to some percentage.
Your lender will give you an estimate of closing costs on the purchase of a particular house you’ve selected. This is called a “Good Faith Estimate”(“GFE”). Then, a day or two before the closing, the lender will provide you with the actual “Settlement Statement”, which is the final and complete form with all the numbers for the sale, including the actual closing costs.
What closing costs can you expect?
Closing costs vary widely based on where you live, the property you buy, and the type of loan you choose. Here is a list of some of the fees commonly seen on Settlement Statements.
- Application Fee: This fee covers the cost for the lender to process your application. Before submitting an application, ask your lender what this fee covers. It can often include things like a credit check for your credit score or appraisal as well. Not all lenders charge an application fee, and it can often be negotiated.
- Appraisal: This is paid to the appraisal company to confirm the fair market value of the home.
- 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.
- Credit Report: A credit report is pulled to get your credit history and score. Your credit score plays a big role in determining the interest rate you’ll get on your loan.
- Escrow Deposit for Property Taxes & Mortgage Insurance: Often you are asked to put down two months of property tax and mortgage insurance payments at closing.
- Home Inspection: You will likely get your own home inspection to verify the condition of a property and to check for home repairs that may be needed before closing.
- Home Owners Association Transfer Fees: The Seller generally, but not always, pays for this transfer which will show that the dues are paid current, what the dues are, a copy of the association financial statements, minutes and notices. The buyer should review these documents to determine if the Association has enough reserves in place to avert future special assessments, check to see if there are special assessments, legal action, or any other items that might be of concern. Also included will be Association by-laws, rules and regulations and CC & Rs.
- Homeowners’ Insurance: This covers possible damages to your home. Your first year’s insurance is often paid at closing.
- Origination Fee: This 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.
- Prepaid Interest: Most lenders will ask you to prepay any interest that will accrue between closing and the date of your first mortgage payment.
- Private Mortgage Insurance (PMI): If you’re making a down payment that’s less than 20% of the home’s purchase price, chances are you’ll be required to pay PMI. If so, you may need to pay the first month’s PMI payment at closing.
- Property Tax: Typically, lenders will want any taxes due within 60 days of purchase by the loan servicer to be paid at closing.
- 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. This is not required in all states.
- Title Search or Exam Fee: This fee is paid to the title company for doing a thorough search ofthe property’s records. The title company researches the deed to your new home, ensuring that no one else has a claim to the property.
- Title Insurance: This is insurance to assure the lender that you own the home and the lender’s mortgage is a valid lien, and it protects the lender if there is a problem with the title. Similar to the title search, but always a separate line item.
- Transfer Taxes: This is the tax paid when the title passes from seller to buyer.
- Underwriting Fee: This also goes to your lender, covering the cost of researching whether to approve you for the loan.
Lowering your closing costs
Remember that you can shop around before writing an offer, and you may be able to find other lenders who are willing to offer you a loan with lower fees at closing. Also, home buyers can negotiate with the seller over who pays these fees. Sometimes the seller will agree to assume the buyer’s closing fees.