Closing costs are the fees charged by a lender for issuing a mortgage loan.
The origination fee is the most costly but there are several items that can be included in closing costs from the survey to a charge for your credit report.
In this article we’re going to break down the different fees many lenders charge and offer some tips for getting getting the best deal.
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How Much are Closing Costs?
Closing costs will vary widely as there are a number of factors that determine closing costs.
Costs will vary depending on the location, the property itself, the lender you use, even the type of home loan you get.
Your credit score can also have an impact on your closing costs, the lower your score the higher the risk to the lender.
More risk means higher lender fees to compensate for the increased risk.
Homebuyers are usually charged between 2%-5% of the purchase price in closing costs.
Before you decide which lender you want to work with, you can ask for a loan estimate which has replaced the good faith estimate, GFE, and is required to be supplied to the borrower within 3 days.
How to Negotiate Lower Closing Costs
The amount of closing costs charged will vary from lender to lender. When you first speak to a lender they will provide you with a loan estimate which will clearly break down closing costs. You can use this loan estimate to help you negotiate a better deal on your mortgage.
Get a Loan Estimate from Multiple Lenders
You should never just speak to one lender, you need to make sure you’re getting a great deal first. You should get a loan estimate from at least 3 different lenders and compare closing costs. You can then use these loan estimate to help you negotiate the best deal.
Improve Your Credit Score
Your credit score will play a big role in determining not only the rate you receive but how much your closing costs will be. The higher your score, the lower risk you present, therefore you will get offered the most competitive offer.
Pay down your credit card balances before applying for a mortgage. Keep your credit card debt below 15% of your cards limit to maximize your credit score.
Rolling Closing Costs into the Loan
Closing costs cannot be rolled into the mortgage in most cases. A mortgage has a maximum loan-to-value ratio that is allowed. A VA loan is 100% financing, since you are not required to use a down payment. If you included closing costs into the loan, the loan would be for more than the sales price of the home.
The only mortgage loan that allows you to finance more than 100% of the LTV ratio are USDA loans.
Maximum Amount of Closing Costs Seller can Pay for
- FHA Mortgage – 6%
- VA Home Loans – 4%
- USDA Guaranteed – 6%
- FHA 203k Rehab Loans – 6%
- Conventional Loans – 3%
Seller Paid Closing Costs
Sellers are allowed to pay closing costs on behalf of the buyer. In some cases the seller can pay up to 6% of closing costs, as is the case with FHA loans.
First-time homebuyers are most likely the ones who would ask for seller paid closing costs because money is typically tighter for them. Sellers are not usually likely to pay closing costs unless it is a buyers market and they need their home sold asap.
Use an experienced real estate agent to help you negotiate details of the purchase agreement, including closing costs.
Fees that may be Included in Your Closing Costs
An application fee is something that some lenders may charge. It’s a fee for processing the initial loan application and can range from $200-$400 but can often be negotiated.
Home Appraisal Fee
A home appraisal is a professional evaluation of a property’s current market value. You can expect to pay around $300-$400 for the appraisal fee.
Some lenders have an attorney that will review all the mortgage documents and disclosures to ensure nothing is missed. Some states require an attorney to be present at closing, not all states require this. Expect to pay a few hundreds dollars in Attorney fees.
The escrow or closing fee is what is paid to the escrow agent or attorney for holding money in an escrow account for the final closing. The escrow fee is usually split between the buyer and seller.
Closing fees are charged by the title company or escrow company for conducting the closing. The costs will be a couple hundred dollars.
This fee covers the costs of sending documents via a courier, USPS, UPS, FedEx, etc.
Credit Report Fee
Pulling a trig-merge credit report costs the mortgage company money. This fee is usually passed down to the borrower in closing costs. The credit report fee will be between $25-$40, but can probably be waived.
You will be charged pre-paid interest from your closing day until the end of the month. This is why many borrowers prefer to close at the end of the month to reduce closing costs.
Real Estate Taxes and PMI Escrow Deposit
Property taxes will need to be pre-paid for the first 2 months. If you’re required to carry mortgage insurance you can expect to pay 1/6th of your annual premium upfront in your closing costs.
Pre-Paid Hazard Insurance
Hazard insurance protects your home from damage. Closing costs may include a pro-rated amount of closing costs for the year.
Up-Front FHA MIP
FHA loans have an up-front mortgage insurance premium (UPMIP) that is equal to 1.75% of the loan amount.
You’re allowed to pay interest up-front to reduce the given interest rate of your loan in the form of discount points. One point costs 1% of the loan amount and will reduce the interest rate by 0.25%.
Flood Certificate Fee
This fee is paid to a company to evaluate if your home is in a flood zone. If it is, you will need to carry flood insurance.
The new title will need to be recorded at closing. The recording fee is usually charged at $15 per page.
Whenever a property is transferred from one owner to another there may be fees involved.The transfer tax fee will depend on the county the home is located in.
HOA Transfer Fee
The seller will need to transfer the HOA account to your name. There may be a fee for this, but it should be covered by the seller.
This is a fee the lender charges for submitting and processing your loan application. Not every lender charges this fee and it may be negotiated.
An inspection for termites, dry rot, etc. may be required in your state, or by your lender. Some loans, such as FHA loans, VA loans, USDA, and 203k loans require a pest inspection prior to closing. Average cost is between $80-$200 depending on the square footage of the home.
The lender will get a lender’s title insurance policy on the title of the property to protect themselves in case there is an issue with the title, or deed, to the home.
You as the borrower will have owner’s title insurance policy that will help protect you in the event someone comes forth to challenge your ownership.
Title Search Fee
A fee for checking the history of a title and ensuring there are no active liens, or other title issues.
This is a fee charged for the lenders underwriters to process your loan manually. This fee is not charged by all lenders and you should try to negotiate this fee down, or have it waived altogether.
The origination fee is usually the largest fee charged by lenders. It covers the costs the lender needs to make a profit on issuing the loan. It may also be called “origination points” on average this fee is about 1-2% of the loan amount.
A survey company must come out to measure the property lines and ensure your property is not encroaching. This may or may not be required in your state.
Wire Transfer Fee
This fee covers the cost of the wire transfer to the escrow company.
The cost to lock in your interest rate
VA Funding Fee
If you’re getting a VA loan there is a one time VA funding fee that you will pay at closing. The funding fee is what helps fund the program for this Country’s veterans.
Tax Service Fee
This fee covers the costs of ensuring your property taxes have been correctly applied to your account. This is another fee that is fairly small and could be negotiated with your mortgage lender.
A home inspection is not required to close on a home nor will you pay for it at closing. It is something you as a buyer need to arrange and pay for out-of-pocket.
No Closing Costs Loan
There are some lenders that are paying closing costs for you and marketing it as a no closing cost refinance or mortgage.
Keep in mind that the lender is still getting paid, they are just making up that money elsewhere in the loan.
Usually a no closing cost loan will have a higher interest rate so the lender can make more money on the back end of the loan instead of up-front in the form of closing costs.