What are closing costs on a house?
Whether you’re buying or selling a home, the completion of the transaction is finalized with a “closing.” A closing can be held in the office of a title company, an attorney, or performed online using a digital signature system. At closing, both the buyer and seller will settle the fees associated with the transaction, the mortgage note will be issued, and certain fees will be paid by each party. If a real estate agent or agents assisted with the deal, they are paid at closing. There may be buyer and seller credits exchanged that are associated with property taxes, utilities, and other items. In the end the ownership of the property is transferred from the seller to the buyer and the seller is paid by the buyer.
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Average closing costs are approximately 2% to 5% of the property’s purchase price. This is in addition to any commission owed to a real estate agent.
By law, either a mortgage lender or a mortgage broker must provide you, the borrower, with a Good Faith Estimate (GFE) of closing costs (also called settlement fees), no later than three business days after the lender/mortgage broker receives either your loan application or information sufficient to complete an application.
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Read on to learn more about what are closing costs on a house.
How much are closing costs on a house?
If you complete a mortgage application, the lender or mortgage broker will send you a Good Faith Estimate (GFE) that lists the loan terms and the settlement charges (closing costs) you would pay if you are approved for the loan. The GFE explains which charges may change (or be recalculated at time of closing) and which charges will remain the same. The GFE is a standardized form that all lenders use, which makes it easy for people who are shopping for a mortgage to compare each lender’s closing costs. Your lender can explain how closing costs work.
Getting a GFE is not a loan commitment, and you are not obligated to accept a loan from a lender or mortgage broker who provides you with a GFE.
According to The U.S. Department of Housing and Urban Development (HUD), until the lender gives you a GFE, loan originators are only permitted to charge you for the cost of a credit report.
Closing costs vary from lender to lender. Fees associated with closing come from various parties to the transaction including:
The lender. All mortgage lenders charge fees related to issuing a mortgage loan. These typically include a loan origination fee, points, application and processing fees, etc. Some of these may be negotiated or waived depending on the type of loan you are getting and your banking relationship with the lender.
State and local government fees. These may include recording fees, transfer tax, and others, depending on your state and county.
Title company. In California,
the buyer typically pays the premium for title insurance, which includes a title search, lien search, and the premium for the lender's title insurance policy.
Examples of how much closing costs can be based on different purchase values.
It’s not that simple—closing costs vary based on the above.
Who pays for closing costs?
Both the buyer and seller are responsible for covering different closings costs associated with the transaction. Some fees may be negotiated between the parties, while other fees (particularly lender fees and government fees) are not negotiable.
Why are closing costs necessary?
Closing costs when buying a house are necessary to settle the transaction between all the parties involved in the sale of the property. The parties include the seller, the buyer, a title company, possibly the buyer and/or seller’s attorney, and the real estate agent(s).
What is included in mortgage closing costs?
Buyer closing costs include:
This is a fee that may be charged at the start of the loan process. Lenders typically charge for processing the borrower’s loan application.
Also called the escrow fees or settlement fees, these fees are for management of the funds and documents associated with the “closing of escrow” transaction.
Mortgage lenders require the borrower to get an appraisal of the property they seek to buy. The appraisal provides a market value of the property, which the lender uses to determine the loan to value ratio (LTV), which is used to determine how much of a loan the borrower can get. Lenders will not give a loan for more than a property is worth.
The homebuyer may choose to pay an attorney to assist with the closing.
This is for any documents that are sent/mailed using a courier or mail-type service. If the closing is done digitally, this fee may not be charged.
Seller closing costs may include:
Also called closing fees or settlement fees, these fees are for management of the funds and documents associated with the “closing of escrow” transaction.
The home seller may choose to consult with an attorney to assist with the closing.
Credits toward closing costs.
Credits can come from the lender, in the form of waived fees. However, some lenders will charge a higher interest rate, so be sure to ask if credits are truly free. Credits from the seller are known as a seller concession, which can include money for repairs or seller-paid closing costs that were agreed to in the sale contract as an incentive to the buyer.
If the home is located in a gated community or is part of a self-governing community where the homeowners collectively pay to maintain the community, then association fees may be due at closing.
Prorated property taxes.
It is likely that all or part of the annual property tax will already have been paid by the seller. The taxes owed or due will be calculated by the closing agent.
Can I negotiate the closing costs with the seller?
In some cases, the seller may be willing to cover a portion of the buyer's closing cost, which is called a “seller's concession.” Why would a seller pay for some of the buyer’s closing costs? If the seller is eager to sell or has had trouble selling the home, they may offer a concession to help move the sale forward.
That said, there are limits as to how much sellers can cover, based on the loan type. Your lender can help you calculate the thresholds.
FHA loans. The seller may contribute up to 6% of closing costs.
The seller may contribute up to 4% of closing costs.
- Less than 10%, the seller may contribute up to 3%
- 10 – 24.99%, the seller may contribute up to 6%
- 25% or more, the seller may contribute up to 9%
When are closing costs paid?
Closing costs are paid on a closing date that is mutually agreed upon by the home seller and the home buyer.
By law, your lender must give you your Closing Disclosure at least three business days before your closing. Your Closing Disclosure states how much you will pay for your loan, so check the numbers carefully so you can alert your lender to any errors. See an interactive sample Closing Disclosure
Can I roll closing costs into my mortgage?
Yes, some closing costs can be rolled (included) in your mortgage amount. The main advantage of including closing costs in a mortgage is that you don’t need to have a large amount of cash available at closing. The disadvantage is that closing costs increase your loan amount and you’ll be paying interest on this additional amount. When possible, it’s best to save up money to pay for closing costs without rolling them into your mortgage.
How to save for closing costs?
Saving for closing costs can start at any time, but the sooner the better. If you know you’ll be shopping for a home in the next year or two, start saving now. If you can afford to put aside $200 each month, at the end of the year you’ll have $2,400 for closing. It doesn’t sound like much, but every dollar helps. If at closing, you do decide to roll the closing costs into the mortgage then you can use your savings to make improvements to the home when you move in.
Thinking of buying a home? This calculator provides an estimate of your monthly payment and will help you determine how much you can spend on a new home. Try this Mortgage Qualifier Calculator
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