As a potential brand-new homeowner, your first thoughts might turn toward the amount you’ll pay for your monthly mortgage payments. But have you considered how much you’ll have to pay for the down payment or closing costs for your home loan?
Generally, you’ll have to pay closing costs when you purchase a home — no ifs, ands or buts. But did you know that in some cases, the seller might even pay for your closing costs?
So, how much are closing costs, who pays them and what are they, anyway? These are great questions, and it’s a good idea to understand the answers to them long before you start house hunting.
It’s imperative that you understand closing costs so you’re fully informed before you buy a home. We’ll guide you through all the details and break down closing costs into bite-sized pieces.
What are Closing Costs?
When your lender agrees to underwrite and provide financing for your loan, you have to pay processing fees. Closing costs cover a range of items, from the application fee to searches on your home’s title.
You’ll pay your closing costs and down payment when you attend your closing meeting.
What Fees Can You Expect at Closing?
Many smaller, separate fees make up your closing costs. However, you may not need to pay for every fee on this list, like the application fee or credit report fee.
Your lender will have more details on which fees on this list apply to you, and you’ll also see some of these fees on your Closing Disclosure (which you should receive at least three days before you close). The Closing Disclosure details your purchase price, interest rate, taxes and insurance and of course, closing costs.
Let’s take a look at what you need to know about the following closing costs before you finalize your loan.
You may incur the following fees at closing:
- Application fee: Morty does not charge an application fee, but other lenders might.
- Appraisal: An appraisal is a report on your home’s worth. A third-party appraiser assures your lender that it’s not lending you too much money — beyond what your home is worth.
- Attorney fee: Some states require a real estate attorney to draw up title paperwork. Fees vary depending on real estate closing needs and local attorney rates.
- Closing fee or escrow fee: Escrow fees set up the escrow account for taxes, private mortgage insurance (PMI) and homeowners insurance. These fees vary widely depending on state regulations.
- Courier fee: Some lenders charge courier fees to send various documents to different parties. You can expect to pay roughly $20 for this service.
- Credit report: Your lender will pull your credit profile in order to determine your interest rate and other qualifications for a mortgage loan. Morty does not charge for a credit report.
- FHA upfront mortgage insurance premium (MIP): If you get an FHA loan (a loan backed by the Federal Housing Administration) you must pay an upfront mortgage insurance premium (MIP) at closing.
- Flood determination: You may have to pay a flood determination or flood certification fee to make sure your home does not rest in a flood zone.
- Homeowners association transfer fees: If the home you will purchase has a homeowners association (HOA), an organization that makes and enforces rules in your new neighborhood, you may need to cover the transfer to the HOA. Sometimes the seller pays these costs, but in a hot real estate market, as the buyer, you may need to pay these fees.
- Homeowners insurance: Many lenders require you to pay for a year of homeowners insurance upfront. The cost of homeowners insurance costs will depend on the state in which you live.
- Lender’s policy title insurance: Lender’s title insurance protects your lender in case something happens with the title to your home, such as if another person lays claim to the property.
- Loan discount points: You can pay your lender discount points, also called basis points, in exchange for a reduced interest rate. Doing so lowers your monthly mortgage payments.
- Origination fee: Underwriting your loan and processing it costs money in the form of an origination fee.
- Prepaid interest: Your lender may have a policy in which you must pay any interest that accrues on your loan between your closing date and the first date you make your first mortgage payment. This figure will depend on your loan amount, interest rate and closing date.
- Private mortgage insurance: Private mortgage insurance (PMI) refers to a type of insurance that you pay if you have a conventional loan and your down payment is less than 20%. PMI protects your lender in the event that you discontinue paying your mortgage. You may have to pay the first month of PMI at closing, and the amount will depend on how much you borrow.
- Property tax: Your lender may require you to pay for property taxes upfront when you close on your home. Property taxes include the taxes you pay to your local government for things like supplies and salaries for public safety workers, public schools, street upkeep, public spaces and sanitation. The amount you’ll pay depends on your state’s average property tax rate and your appraisal value.
- Recording fees: Local or city governments require payment for updating land records.
- Survey fee: A land survey shows you exactly where land property lines are drawn. Some states require a land survey before buying a home. Land surveys can cost between $200 and $800.
- Title company title search: Title insurance companies do title searches to find exactly who owns a property. It makes sure that someone other than the seller can’t lay claim to the property. A title company usually charges between $200 and $400 for a title search.
- Transfer taxes: When the title of a property transfers hands, you may pay transfer taxes. The seller can also pay them or you can split them with the seller. The amount depends on your state, city or county.
- Underwriting fee: Underwriters determine whether your lender should undertake the risk of lending to you. A mortgage underwriter can approve or deny your loan application. The underwriting fee costs depend on the loan type and lender.
- VA funding fee: Anyone who gets a VA loan, which is a loan that you can get if you’ve served or been honorably discharged by the military, must pay the VA funding fee, which keeps the VA program going. The VA loan program is backed by the Veterans Administration. The VA funding fee will cost you 2.3% of the amount borrowed.
Who Pays Closing Costs?
Typically, the buyer pays closing costs in their entirety. However, the buyer can negotiate with the seller to help cover closing costs. In some cases, certain closing costs are dictated by location. These are called seller concessions, also called seller credits.
The seller, however, can only contribute up to a certain percentage of closing costs:
- Conventional loans: Three percent for a down payment less than 10% of the home purchase price, 6% for a down payment between 10% and 25%, 9% for a down payment of 25% or more of the purchase price and 2% for investment properties
- FHA loans: 6%
- USDA loans: 6%
- VA loans: 4%
What’s the benefit to the seller paying closing costs? It can help the seller close the deal, particularly if they find themselves in a buyer’s market.
Educate Yourself About Closing Costs
The more you know about closing costs early on in the process, the more you’ll understand when your lender rattles off words like “points” and “origination fees” or you see those terms in your mortgage documents.
Closing costs generally cover the processing costs associated with getting a mortgage loan. Many separate fees make up the umbrella term “closing costs.”