When you get a mortgage there are closing costs involved.
On average closing costs run between 2%-5% of the purchase price.
However, the buyer is not the only party that must pay fees at closing.
Sellers must pay for both their real estate agent’s, and the buyers agent’s commission that is typically 6% of the sales price .
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Rolling Closing Costs into the Loan
Usually you cannot roll your closing costs into the loan except in the case of USDA loans. Mortgage loans have a maximum allowable loan-to-value ratio (LTV ratio). Your loan plus closing costs, minus the down payment cannot exceed the LTV limit.
For example; An FHA loan has a maximum LTV ratio of 96.5%. You are not able to get an FHA loan for more than 96.5% of the sales price. FHA requires a 3.5% down payment bringing the LTV to the maximum limit, so you cannot roll closing costs into the loan.
The same applies for all other types of mortgage loan, except USDA loans. You can roll closing costs into a USDA loan as long as the property appraises for more than the sales price.
Paying Commissions to the Real Estate Agent
Closing costs for the seller come in the form of real estate commissions paid at the end of the transaction. When you hire a realtor and put your home up for sale you agree to pay 6% in commission which is split between the buyers and sellers agent.
6% is the standard fee in most areas of the country, but can be more or less depending on where you live. Some real estate agents and brokers may negotiate and charge less than 6%, but it’s unlikely.
Since they really only get half of the commission, most good agents will not want to work for less than 3%.
Sellers can Pay the Buyers Closing Costs
Getting a seller to agree to pay your closing costs is a tough sell. Especially when you consider they are already paying 6% of the sales price in commission, they will not be happy about losing even more profit, that is if they have any to give.
A tip to negotiating for the seller to pay closing coasts is to offer to purchase the home for a higher amount, if they agree to pay a certain amount of your closing costs.
As an example; Let’s say you’re going to make an offer on a $200,000 home. You can offer $206,000 with $6,000 in seller contributions you can use to pay your closing costs.
The extra $6,000 price amounts to a couple bucks increase in your payment, but significantly lowers the amount you need to bring to closing. Any seller contributions need to stated in the purchase agreement.
The amount of seller paid closing costs you’re allowed to use varies depending on the type of mortgage loan.
Maximum Allowable Seller Paid Closing Cost by Loan Type
- FHA Loans – 6%
- VA Loans – 4%
- USDA Loans – 6%
- 203k Loans – 6%
- Conventional Loans – 3%
Sellers Can Pay for Upfront FHA, VA, and USDA Fees
Most Government backed home loans have an up-front fee. Seller contributions can be used to the up-front fee.
FHA Loans – An FHA mortgage requires an up-front mortgage insurance premium of 1.75% of the loan amount. The seller can pay the entire amount, if seller contributions are not enough to pay 100% of the up-front fee they cannot cover any part of it.
VA Loans – VA loans require an up-front funding fee of 2.15%-3.3% of the loan amount. Sellers contributions can cover any amount of the funding fee up to 100%.
USDA Loans – USDA guaranteed loans require a guarantee fee of 2% of the loan amount to be paid up-front. Seller contributions can cover these costs.
How to Get Lower Closing Costs
Closing costs vary based on several factors. The lender you use, the price of the home, the type of loan you get, even your credit score can affect the amount of closing costs.
Increase your credit score – Get a copy of your credit report and dispute any errors with the credit bureaus. If you have high credit card balances, pay them down below 15% of the art limit to maximize your score.
Compare loan offers – When you apply for a home loan your loan officer will give you a loan estimate that clearly breaks down the various fees, interest, and closing costs. Speak to at least 3 different lenders to see if they can give you a better deal.
What’s Included in Closing Costs
Loan Application Fee
Lenders charge an application fee for processing and submitting the initial mortgage loan application. The costs runs between $200-$400, not all lenders charge this fee and it may negotiated.
When you get a mortgage a home appraisal will be performed to get the true market value of a a home. The appraisal is required to be paid by the buyer a few weeks before closing.
Lenders may have an attorney review all the documents to ensure nothing is missed and all the required paperwork is in order. These fees can come out to a few hundred dollars. Not all states require a lawyer to be involved and not all lenders use one.
When a home offer is accepted an earnest money deposit is required. This money and the down payment will be sent to an escrow company, usually the title company to hold in an escrow account until closing.
The closing fee is charged by the title company for hosting closing day. This fee is small, your mortgage lender may not charge this fee.
You must pay for documents sent by a carrier or delivery service.
Credit Report Fee
Some lenders may charge a fee for pulling your credit report and scores. A credit report fee should be no more than $35.
When you close you pay interest for the remaining days left in the month. This is a reason some buyers like to close at the end of the month to lower the amount of pre-paid interest.
Real Estate Taxes and PMI Escrow Deposit
You will pay 2 months of your mortgage insurance premium and up-front property taxes.
Pre-Paid Hazard Insurance
Homeowners insurance protects your home from natural disasters and other major damages. You may have to pay a pro-rated amount of your annual premium at closing.
Up-Front FHA MIP
If you’re using an FHA loan you’ll have to pay an up-front mortgage insurance premium of 1.75% of the loan amount.
Discount points are a way you can lower your interest rate by paying some of the interest up-front. Each point is 1% of the loan amount and lowers your mortgage rate by 0.25%.
Flood Certificate Fee
Your lender will have the property inspected to see if it’s located in a flood zone requiring flood insurance.
A recording fee of $15 per page for issuing and recording the deed.
The new title will need to be recorded at closing. The recording fee is usually charged at $15 per page.
Some counties charge a transfer fee when a property is transferred to other person.
HOA Transfer Fee
Some homeowners associations charge a small fee for transfer the account to a new owner.
Some states require a pest inspection be performed prior to closing. All Government loans, FHA, VA, USDA, and 203k loans require a pest inspection prior to funding.
Title Insurance Premium
Title insurance is required for both the buyer and seller. Owners title insurance protects the lender in case there are any issues with the title. Owners title insurance protects the borrower in the event someone claims ownership.
Title Search Fee
A fee the title company charges for performing a title search to check the history of the deed.
Mortgage Underwriters organize and prepare all of the loan documents. This fee is not charged by all mortgage companies and will be no more than a couple hundred dollars.
Loan Origination Fee
The origination fee is what the lender charges for processing and funding the loan. The average origination fee is between 1%-2% of the purchase price.
When buying a home a survey will be performed to measure the property lines. On average you can expect to pay around $300.
Wire Transfer Fee
This fee covers the cost of any wire transfer fees.
VA Funding Fee
If you’re getting a VA loan there is a one time 2.15% VA funding fee