The down payment isn’t the only cost you need to budget for when buying a home.
Lenders charge closing costs whenever you get a new mortgage, or refinance your current loan.
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What are Closing Costs?
Closing costs are the fees charged by a lender for processing and issuing a loan. On average, closing costs on a mortgage loan are between 2%-5%; the cost is dependent on several different factors, including your credit score, down payment, and loan amount.
Closing costs are fees charged by a lender for processing and issuing a new mortgage or refinancing a loan. Included in closing costs is the loan origination fee, property taxes, and upfront mortgage insurance.On average expect to pay between 2%-5% of the loan amount.
Fees Included in Closing Costs
Application Fee – 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. Usually, this fee is paid before closing.
Lawyer 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 hundred dollars in attorney fees.
Escrow Agent – The escrow or closing fee 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.
Title closing Fee – Closing fees are charged by the title company or escrow company for conducting the closing. The costs will be a couple of hundred dollars.
Courier Fee – 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.
Pre-Paid Interest – 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 two 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) equal to 1.75% of the loan amount.
Discount Points – You’re allowed to pay interest up-front to reduce your loan’s given interest rate 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.
Recording Fees – The new title will need to be recorded at closing. The recording fee is usually charged at $15 per page.
Transfer Tax – Whenever a property is transferred from one owner to another, fees may be 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 the seller should cover it.
Processing Fee – 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.
Pest Inspection – 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 before closing. The average cost is between $80-$200 depending on the square footage of the home.
Title Insurance – The lender will get a lender’s title insurance policy on the property’s title to protect themselves in case there is an issue with the title, or deed, to the home. The borrower will have the owner’s title insurance policy that will help protect you if 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.
Underwriting Fee – This is a fee charged for the lender’s underwriters to process your loan manually. All lenders do not charge this fee, and you should try to negotiate this fee down or have it waived altogether.
Origination Fee – 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.
Survey Fee – 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.
Commitment Fee – 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.
Home Inspection – 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.
How Much are Closing Costs?
Closing costs will vary depending on the borrower’s credit score, the property itself, the lender you use, even the type of home loan you get.
Your credit score can also impact 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 three days.
How to Negotiate Lower Closing Costs
How much you pay in closing costs will vary based on several factors including your credit score, loan amount, and the lender you work with. When you first speak to a lender, they will provide you with a loan estimate that breaks down the terms of the loan and all the associated fees. 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 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 three different lenders and compare closing costs. You can then use these loan estimates to help you negotiate the best deal.
Improve Your Credit Score
Your credit score will play a big role in determining the rate you receive and 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 card limit to maximize your credit score.
More tips to improve 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 include closing costs into the loan, the loan would be for more than thehome’s home’s sales price.
The only mortgage loan that allows you to finance more than 100% of the LTV ratio is USDA loans.
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.
Maximum Seller-Paid Closing Costs Allowed by Loan Type
- FHA loans – 6%
- VA Loans – 4%
- USDA Loans – 6%
- 203k Loans – 6%
- Conventional Loans – 3%
No Closing Costs Mortgage Loans
Some lenders do not charge closing costs and market it as a no closing cost loan.
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 that the lender can make more money on the back end of the loan instead of up-front in the form of closing costs.
