Closing costs, also known as settlement costs, are the fees you pay when obtaining your loan.
After you’ve applied for a home loan, saved for a down payment, gone house hunting, written offers, and now closing costs.
What the heck are closing costs?
It’s hard not to feel blindsided by these costs, especially because they come at the end of the home loan process, and it isn’t always clear what exactly you’re paying for.
Understanding what closing costs are and budgeting for them will smooth out the final stretch of the home-buying process.
What are Closing Costs?
Costs that are charged to the buyer and seller to finalize the transaction. Each party has their own fees they are responsible for.
These costs include property taxes, homeowners insurance, title insurance, appraisals, inspections, interests, county transfer taxes,county recording fees, notary fees, escrow and title fees, underwriting fees, credit report fees, and so on.
An experienced loan officer can go over what the costs would be for your specific situation. How a Mortgage Loan Officer can Help you from Start to Finish
How are closing costs calculated?
Not every buyer will pay the same amount in closing costs.
Each state and county has different fees required for the transfer of the ownership.
What you’ll need to pay for will depend on where you are purchasing, the home loan type, the amount of the purchase, and what time of year the purchase is happening.
A down payment is not considered a closing cost.
The standard rule of thumb: buyer closing costs are anywhere from 2% to 5% of the purchase price. Above $200,000 the costs are usually in the 3% range.
Who Pays Closing Costs
Both buyer and seller each have their own closing costs when finalizing a loan transaction.
However, a buyer can negotiate for the seller to pay for all closing costs. This needs to be negotiated upfront when making a purchase offer. This type of arrangement is typically referred to as a “seller credit”, or in some cases “seller concessions”.
Requesting a seller to pay for all of buyers closing costs is common but isn’t always the greatest strategy for some properties.
If the property is a “hot” property, then asking for a seller credit could make the offer less attractive.
Especially if the seller is receiving other purchase offers without seller credit requests.
Can Closing Costs be Rolled into the loan?
When purchasing a property, the only cost that can be rolled into the loan is a funding fee. All other costs would have to be paid for at closing.
Home loans with funding fees:
Closing costs can be paid by:
- Seller Credit
- A combination of seller credit plus funds from your own account
- A gift from a family member
- A loan from 401K can also be another option (there is usually no penalty when it’s for a purchase of a home. Double check with your 401k provider)
When will you know what your closing costs are?
If you are working with us, you’ll receive an estimate of what your costs are shortly after signing the purchase agreement. These costs are always estimated until the end of the transaction which we call “closing”.
Can home buyers avoid paying closing costs?
Whether you are selling a home or buying a home there is always closing costs associated. This is because of all the third party fees that are required to facilitate a home loan transaction.
Closing costs fees include property taxes, homeowners insurance, recording fees, state transfer fees, escrow and title charges, appraisals, surveys, lender fees, interest, etc. The list goes on, and on.
As a buyer closing costs typically run about 3% if the home purchase is $200,000 and up. For transactions that are lower, the percentage may go up to 4-6%.
So, for a $200,000 purchase the cost is $6000. A pretty hefty amount.
There isn’t a way to avoid closing costs, but you can minimize the amount that you have to pay
Here are some options:
You can ask the seller to pay for your closing costs – This request needs to be done when writing the purchase offer. Make sure to discuss this option with your real estate agent, and get a percentage amount to request from your loan officer.
This is a very common practice but it may effect how much the seller is willing to except for a purchase price. Sometimes the seller will request for the purchase price to be increased in order to accept the terms of the credit.
You can ask your loan officer if they can provide a lender credit – Requesting a lender credit will mean that your interest rate will increase, depending on how much you need. This is a good option if the seller isn’t willing to cover your closing costs.
You can pay for half and request for the seller to pay the other portion If you have some funds to cover the closing costs but still short, you can always ask for the seller to pay for the remainder or you can get a lender credit for the portion that you need
Get a loan from your 401K – Typically, there is no penalty if you are withdrawing due to a home purchase (double check this with your provider). Also a plus side is that the loan is not used towards your debt-to-income ratio (which means it doesn’t affect how much you qualify for)
Get a gift from a family member – Maybe you have a family member that is willing to help you by providing a gift. This is acceptable with all the home loan programs that we offer.
Closing costs are paid at the end of the loan transaction. The costs vary based on where you are purchasing, what time of year you are purchasing, what the loan amount is, the state and county the property is located in, and the loan type.
What are included in closing costs?
Lender fees. If you are getting a home loan, you’ll have fees charged by the lender for facilitating the transaction.
Here are some common lender fees.
- Underwriting Fee
- Credit Report Fee
- Processing Fee
- Administration Fee
- Tax Cert
- Flood Cert
An optional closing cost is discount points. Discount points can be used to lower your interest rate.
Escrow & Title fees. Most of the closing costs (about 70%) are escrow and title related.
Escrow and Title fees include:
- Escrow Fee / Settlement Fee
- Notary Fee
- Lender Title Insurance
- Owners Title Insurance
- Wire Fee
- Messenger / Courier Fee
- Title Exam Fee
- Recording Fee
- Title Search
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