Learn About the Fees Associated with Closing on Your Home Loan
Closing is the part of the home purchase process in which the sale is finalized, and the title for the property is transferred to the buyer. Typically, this is a happy time for most people, but unfortunately, you have to pay for that happiness. That's right, your first real expense is already staring you in the face. So what's the deal with these closing costs?
What Are Closing Costs?
At closing, there are fees that must be paid to the lender for their services as well as other fees associated with the loan process. These fees may be paid by either the buyer or the seller, or sometimes a combination of both. The costs are collectively referred to as closing costs, and are a normal part of any home loan agreement.
What fees are included in closing costs?
Closing costs can vary depending on your location, your choice of loan, and even the property you may have purchased. Not every closing incurs the same costs, and luckily, it is extremely rare to incur all of the fees we are about to list. That being said, possible closing fees you might have to pay include (but are not limited to):
- Application Fee: This is the fee paid to the lender for processing your loan application, and it is typically negotiable.
- Appraisal Fee: Some loan programs require the property you are purchasing to be appraised. This fee covers the cost set by the appraisal company to assess the property's fair market value.
- Attorney Fee: In some states it is actually required to have an attorney go over the loan paperwork for the buyer's sake. This fee can be included in the closing costs.
- Credit Review: This fee is sometimes included in the application fee, but there are times when it is a separate cost. It covers the "hard pull" of your credit report, so the lender has a solid idea of your financial standing.
- Escrow Deposit: More like a security deposit than a fee, buyers are sometimes required to set aside two months worth of property tax and homeowners insurance payments.
- Escrow Fee: The fee paid to the third party attending and conducting the closing (typically an attorney, title company, or escrow company). This is sometimes referred to as the "Closing Fee."
- FHA Upfront Mortgage Insurance Premium (UMIP): FHA loans require mandatory mortgage insurance that is divided into two portions, one of which is usually required at closing, although it can be rolled into the loan amount in some cases.
- Flood Determination or Life of Loan Fee: A fee sometimes paid to a third party company to determine if the property in question is located in a federally designated flood zone (in order to determine whether the buyer needs to purchase flood insurance or not)
- Home Inspection Fee: Though not always required, it is a good practice to pay for a professional home inspection, to assess the condition of the property being purchased, and make note of any repairs that must be made.
- Homeowners Association Transfer Fees: A transfer fee typically paid by the seller to show that the HOA dues are paid current, a breakdown of said dues, as well as a copy of the association financial statements, including minutes and notices. The Association by-laws, rules and regulations, and CC&Rs are usually included with the transfer as well.
- Homeowners’ Insurance: The first year’s worth of homeowners' insurance is sometimes paid at closing.
- Lead-Based Paint Inspection: Paid to a third party for evaluating any possible lead-based paint risk.
- Loan Discount Points: The term “Points” refers to prepaid interest. A point represents one percent of the loan amount. Payment of points will lower your monthly payments.
- Origination Fee: This fee is paid toward the lender for any administrative costs. Origination fees are typically 1% of the loan amount. There are lenders that do not require origination fees.
- Pest Inspection: Covers the cost to inspect for wood damage caused by termites or dry rot. The inspection is mandatory in some states.
- Prepaid Interest: Many lenders require the borrower to prepay any accrued interest between the closing date and the date of the first mortgage payment.
- Private Mortgage Insurance (PMI): For most conventional loans, making a down payment of less than 20% of the home’s purchase price leads to the necessity of private mortgage insurance as security for the lender. The first month of PMI is typically due at closing.
- Property Tax: Any taxes due within 60 days of purchase are typically required to be paid at closing.
- Recording Fees: Charged by the local recording office of the city or county for the recording of public land records.
- Survey Fee: Though not always required, this fee covers the cost of having a survey company verify property lines and other things of that nature such as shared fences on the property.
- Title Company Title Search or Exam Fee: Covers the cost of having a title company do a thorough search of the property’s records, ensuring no other entity has a claim on the property.
- Title Insurance Fees: Divided into two portions. The lender's policy is paid to assure the lender that the borrower is in full ownership of the home and the lender’s mortgage is a valid lien. The owner's policy is usually an optional fee to cover the borrower in the event that their ownership of the property is challenged by another entity.
- Transfer Taxes: Tax that is due when the title is passed from seller to buyer.
- Underwriting Fee: A fee paid to the lender that covers the cost of researching whether or not to approve the borrower for the loan.
- VA Funding Fee: Only for VA loans, this fee is a percentage of the loan amount paid towards the VA to help fund the VA home loan program. Some borrowers are exempt from this fee, and the percentage a borrower is required to pay depends on their type of service and the down payment amount. This fee can be paid at closing, or rolled into the loan amount.
Typically, every closing involves some combination of the fees listed above. Of course, many of these fees can be negotiated with the lender, and there are even loan options that are designed to have the lowest possible closing costs. If you would like to learn about low closing cost home loans, fill out the form below for a risk-free consultation with a mortgage specialist.
How Much are Closing Costs?
You've seen the list, and while it is fairly long and easy to freak out about, it is more beneficial to remember that closing costs are typically around 2 to 5 percent of the purchase price of the home. That means that closing on a home worth $150,000 could accrue closing costs between $3,000 and $7,500. On average, closing costs typically fall somewhere between $2,500 and $5,000.
Keeping that in mind is a great strategy for the home buying process, as you will be armed with a general idea of how much you're expected to pay at closing. When you know the low end and high end of what you may need to pay at closing, you'll have some leverage to negotiate the final figure you're given. Within three business days of receiving your completed loan application, your lender should give you your TILA-RESPA Integrated Disclosures (TRID), which includes a Loan Estimate that details the closing fees associated with your home purchase.
Three days before closing, a second document should be sent to you, with the finalized figures of your closing fees. There shouldn't be much disparity between the fees described on the two documents, as there are limitations for just how much the fees can increase. Again, these costs are negotiable, and some may not be mandatory based on your location or the loan product you have chosen. Always discuss closing costs in depth before making a final agreement. It could save you a ton of money!