closing costs

Real Estate Closing Costs

The closing of a real estate transaction is when the transfer of the property is finalized. All documents completing the transaction are signed, and funds are transferred as necessary to each party. As such, there are various closing costs which may be incurred by both the buyer and the seller. Some of these costs may be paid in advance of the closing.

Specific closing costs can vary by state, but typically average between 2% and 6% of the home price. You will notice that most of the costs below are required by the lender. As such, closing costs will be much lower if you purchase a property in an all cash transaction. However, most individuals need or prefer to finance the purchase of their home with a mortgage.

Seller Closing Costs

The seller usually doesn’t have as many different closing costs as the buyer. However, the big one is usually the commission if applicable. Of course if you manage to sell your home as an FSBO (for sale by owner) you can avoid this fee. However, the services provided by a good realtor should not be underestimated.

The seller may agree, however, to pay some of the buyer’s closing costs, and vice versa, as part of the negotiations in consummating the property transaction.

Attorney fees

Fees paid to an attorney representing the seller. You can shop around and negotiate a fee suitable for you. The average is about $1,000, but varies by location, attorney, and the services provided.

Realtor commission

If applicable, the seller typically pays the commission to the real estate broker. The amount of the commission is usually based on a percentage of the price at which the property is sold. Commissions can vary and are negotiable. But they are usually around 5% for average priced residential homes. The commission percentage is typically lower for higher priced properties.

Recording fee

This fee may be incurred in order to record the satisfaction of the mortgage. The fee varies by state, but is usually no more than $50 for each mortgage.

State Tax/Stamps

Transfer tax paid on the value of the transaction. Varies by municipality.

Buyer Closing Costs (in addition to the purchase price)

Most of the closing costs are borne by the buyer as indicated below. However, it is possible to negotiate an agreement for the seller to pay some of these closing costs (and vice versa).

Attorney fees

Fees paid to the attorney representing the buyer.┬áThis fee varies based on the attorney you choose, but the average is about $1,000. Sometimes you may have to pay at least a few hundred dollars for the bank’s attorney as well.

Origination fees

These are fees paid as compensation to the lender for making and processing the loan. The two common fees here are the application fee and the underwriting fee. The application fee is basically for administrative expenses in processing the loan.

The underwriting fee is for the services in processing your information to determine if your loan will be approved and on what terms. Such fees usually amount to a few hundred dollars each.

These fees generally cannot be negotiated, but vary by lender. The lender may also provide a credit which can offset some of these fees. However, more “points” (see below) may be charged in exchange.

Points

Origination fees can also be paid in the form of points. One point represents 1% of the loan amount. These points represent compensation to the lender and may be negotiable.

The borrower may also wish to pay “discount” points. This essentially represents interest paid up front in exchange for a lower interest rate over the term of the mortgage loan.

Rate Lock Extension Fees

Mortgage applicants often “lock” in their mortgage rate during the application process to protect against rising interest rates until the closing date. A rate lock is often free, but only lasts up to a couple of months. So if the application process drags on, the lock may expire. If mortgage rates have moved down by the time you close , it shouldn’t be a problem. However, if they’ve increased or you just want the certainty of a locked-in rate, the bank may charge you a rate lock extension fee.

Typically, if the delay in closing is the bank’s fault, they will cover the fee. But if the bank claims it is your fault because you were not prompt in providing required documentation, etc. then they will charge the fee to you. As such, it is important to provide all information requested promptly during the application process. Also keep notes as to when documents were provided to the bank.

The bank may try to stick you with the fee even if the delay was on their end. But if you have good records (emails, etc.) to show that you provided requested documents timely you should be okay. Be persistent in insisting that they cover the fee, and they probably will.

Appraisal

The lender typically requires an appraisal in order to confirm the fair market value of the property. This fee averages about $300 to $500 or so and generally cannot be negotiated.

Credit report

A credit report is required and used by the lender in order to help determine your capacity to make the loan payments. This report, along with your credit score, can go a long way in determining the interest rate and other terms you will be able to get on your loan. The credit report fee is usually under $50 and is not negotiable.

Document preparation fee

Some title companies (or lenders) charge this fee for preparation of the legal documents for the closing. It can amount to one or two hundred dollars.

Tax Service Fees

Lender required tax monitoring and tax status research fees offset the cost of monitoring the payment of real estate taxes on the property. These fees are each generally less than $100.

Flood Certification and Monitoring Fees

Cost to determine if the property is in a flood zone at the closing and throughout the life of the loan. If so, the lender will require you to purchase flood insurance on the home. The fees are typically less than $50. However, the cost of flood insurance can be hundreds or even thousands of dollars annually, depending on the flood zone of the property, etc.

Survey fees

These fees are paid to a survey company in order to verify the boundaries of the property being sold. You can use the lender’s service provider, or you can shop around for another provider with a better price. The cost can be up to a few hundred dollars.

Title search, insurance, and settlement agent

The title search fee is paid to a title company to check the public records to ensure the seller owns the property being sold and to make sure the title is marketable and free of defects. The fee is usually at least a few hundred dollars.

The (lender) title insurance policy is required by the lender to protect against title defects not found in the title search as of the date of the closing. Examples include liens or encumbrances, fraud, and erroneously executed or unrecorded documents. The premium is based on the amount of the mortgage loan, and varies from state to state. For an average home, the cost is about $1,000.

Title insurance for the owner is generally optional, and is based on the value of the home. The one time cost is likely worth the peace of mind it can provide.

You can use the default title company provided by the lender, or you can shop around and choose another one with better prices. Although title insurance is only paid once at the closing, a new lender policy will generally be required if you refinance.

A fee must also be paid to the title company settlement agent, who oversees the closing process. This fee is typically a few hundred dollars, but may be negotiable.

Home inspection fee

The lender may require an inspection in order to confirm the physical soundness of the home which will collateralize the loan. Regardless, it is wise to get a home inspection anyway as the future owner of the home. The cost is typically a few hundred dollars. You can negotiate a fair price from an inspector that you choose.

You may also wish to have someone do a pest/termite inspection on the home you are buying. Lenders sometimes may require such an inspection.

State Tax /Stamps

These are essentially taxes charged by some municipalities on the transaction. It can be charged on the deed as a transfer tax, the mortgage (mortgage recording tax), or both.

Recording fees

Paid to file the deed and mortgage (if any) with the county clerk’s office. These fees vary by municipality, but are generally not very significant. They usually amount to no more than a couple hundred dollars.

Prepayments and Escrow

These disbursements essentially represent required prepayments of ongoing costs you will have as the owner of the property.

Mortgage interest

Interest paid for the number of days between the receipt of the loan proceeds (on the closing date) and the first monthly payment of the mortgage loan.

Property taxes

The buyer may have to pay up to six months of property taxes at the closing. Adjustments may be made based on taxes already paid by the seller.

Homeowners insurance

The lender requires one year of homeowners insurance paid up front. The lender needs to protect the mortgage loan collateral (and you need to protect your home). This may also include flood insurance where applicable. You can choose your insurer. Premiums will vary based on several factors such as location, size and condition of home, type of coverage, etc.

Mortgage insurance

This insurance protects the lender against a default from the buyer on the mortgage. It is generally not required if the buyer makes a down payment of 20% or more on the purchase. Note that FHA loans, however, always require mortgage insurance. If required, the cost varies from about .5% to 1% of the loan amount (annually).

Escrow payments

Similar to mortgage insurance, escrow may be optional if the buyer makes a down payment of at least 20% of the purchase price of the home. Payments into the mortgage company’s escrow account are typically for property taxes and home insurance. Two months worth of these items must usually be paid in addition to any prepayments of the same items. Mortgage insurance is also paid in escrow if required.

Closing Costs Paid When You Refinance

The closing costs are essentially the same when you refinance as when you purchase a home. However, you generally do not need an attorney to represent you in a refinance transaction. Also, costs for some items such as the survey may be waived if the service was performed recently. Other costs such as an inspection or the appraisal may also be waived by the lender.

All Cash Purchase

If you purchase property in an all cash transaction, your closing costs will be much lower. There won’t be any title insurance for the lender, origination fees (including points), prepaid interest, escrow of taxes and insurance, mortgage recording tax and fees, credit report, and any other fees required by the lender.

Conclusion

When buying a home, it is helpful to know what types of costs you can expect at closing in addition to the agreed upon purchase price of the home. Some of these costs are negotiable and some are not. Further, the closing costs may also be rolled over into the loan in order to reduce the cash due at closing. However, the maximum amount the lender is willing to loan you may limit the extent to which this can be done.

As the seller, your greatest closing cost will typically be the commission if you used the services of a realtor to help you sell the home. However, you may also have to pay transfer taxes, recording fees, property tax adjustments, and any other agreed upon fees.

When you apply for a loan, the lender will be required to send you a Good Faith Estimate (GFE) form. The form must be mailed to you within three business days from when the lender receives your application. If you apply to more than one lender, this form can be used to compare closing costs charged by each lender such as origination charges.

Your actual closing transaction will be summarized on a HUD-1 form. This will list the contract price (if a sale/purchase) and the various closing costs (sale/purchase and refinance).

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