Your down payment isn’t the only thing you need to bring to the closing table when you buy a home. Closing costs are expenses you pay to your lender in exchange for loan services. Many first-time home buyers underestimate just how much they’ll need to pay in closing costs. Some may not know there are ways to lower what you’ll pay.
Understanding closing costs can be somewhat difficult. We’ll give you an overview of everything you need to know about closing costs before you finalize your loan. We’ll also give you a few tips you can use to limit what you’ll pay.
What Are Closing Costs?
Closing costs are processing fees you pay to your lender. Lenders charge these fees in exchange for creating and servicing your loan. Closing costs cover things like your home appraisal and searches on your home’s title. The specific closing costs you’ll need to pay depend on the type of loan you take and where you live.
You pay your closing costs when you attend your closing meeting for most home loans. During closing, your lender accepts your down payment funds and anything you need to pay in closing costs.
How Much Are Closing Costs?
Closing costs can make up about 3% – 6% of the price of the home. This means that if you take out a mortgage worth $200,000, you can expect closing costs to be about $6,000 – $12,000. Closing costs don’t include your down payment. When you’re buying a home, you may be able to negotiate for the seller to pay for closing costs as well.
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Who Pays Closing Costs?
Both buyers and sellers pay closing costs. However, the buyer usually pays most of them. You can negotiate with a seller to help cover closing costs, which are called seller concessions. Seller concessions can be extremely helpful if you think you’ll have trouble coming up with the money you need to close. There are limits on the amount that sellers can offer toward closing costs. Sellers can only contribute up to a certain percentage of your mortgage value, which varies by loan type.
- Conventional loans: 3%
- FHA loans: 6%
- USDA loans: 6%
- VA loans: 4%
For example, let’s say that you take out a conventional loan worth $200,000. The seller could only contribute a maximum of 3% ($6,000) toward your closing costs. In the event that your closing costs come to less than 3% of your loan value, the seller can only contribute up to 100% of the closing cost value. This means that if your closing costs on the same loan were to equal $2,500, the seller can only offer up to $2,500. These limitations help prevent fraud.
What’s Included In Closing Costs?
Not every buyer will pay the same amount in closing costs. Some costs are lender requirements, some are government requirements and others are optional. What you’ll need to pay for will depend on where you live, your specific lender and what type of loan you take.
Average Closing Costs For Buyers
Before you attend your closing meeting, your lender will give you a document called your Closing Disclosure. This will list out every closing cost you need to cover and how much you owe. Here are some of the most common closing costs you might see on your Disclosure.
Some lenders charge an application fee to process your loan request. This fee varies by lender but can be up to $500. Your application fee is nonrefundable, even if you’re rejected for a loan.
Your lender will order an appraisal through a third-party appraisal management company that will send a professional appraiser to take a look at your home and determine how much your property is worth. Appraisals are important because they set the amount that lenders will let you borrow for a property. It also ensures you aren’t overpaying for a property. Appraisal fees usually range between $300 – $500.
In some states, you can’t close on a housing loan without an attorney. Attorney fees cover the cost of having a real estate attorney coordinate your closing and draw up paperwork for your title transfer. Real estate attorney charges depend on your state and local rates.
Your closing fee goes to the escrow company or attorney who conducts your closing meeting. In some states, an attorney must sign off on every closing. These costs vary depending on your state and whether an attorney must attend your closing.
Courier fees cover the cost of transporting mortgage documents. Expect to pay around $30 in courier fees if your lender charges them.
Credit Reporting Fee
Credit reporting fees cover the cost of pulling your credit report and looking at your credit score. Most credit reporting fees are around $25.
Lenders allow you to pay money upfront on your loan to reduce your interest rate by buying discount points (essentially, buying down your rate to save in interest over the life of the loan). One discount point equals 1% of your loan amount.
For example, if you take out a mortgage for $100,000, one point will cost you $1,000. For a $200,000 loan, a point costs $2,000. Unlike other fees, discount points aren’t mandatory.
Sometimes referred to as reserve fees or prepaids, escrow funds hold reserved money for property taxes, premiums, homeowners insurance and mortgage insurance. Your lender keeps your escrow funds in a special account. The lender then uses the escrow funds to make payments on your behalf as part of your regular mortgage payment.
At closing, your lender might require you to put a certain number of months’ worth of expenses into an escrow account. Though the number of months depends on your lender, many buyers put down two months’ worth of expenses at closing.
FHA Mortgage Insurance
If you take out an FHA loan, you’ll need to pay a mortgage insurance premium upfront at closing. The current MIP rate is 1.75% of your base loan amount. For example, if you borrow $100,000 to buy your home, your MIP due at closing is $1,750. This upfront payment is separate from your monthly MIP, which ranges from 0.45% – 1.05% of your loan value.
If your home is on or near a flood plain, you may need to pay $15 – $25 for a flood certification. This money goes to the Federal Emergency Management Agency which uses the data to plan ahead for emergencies and to target high-risk zones.
Homeowners Association Transfer Fee
Your homeowners association transfer fee covers the cost of moving the burden of HOA fees from the seller to the buyer. It ensures that the seller is up to date on their HOA dues. It also provides you with a copy of the association’s payment and due schedule as well as their financials. Most of the time, the seller covers this cost. However, you might need to pay for your own transfer fee if you’re buying in a very competitive market or you agree to cover all closing costs.
The amount you’ll pay for your transfer depends on your HOA’s policies. If you live in an area without an HOA, you won’t pay this fee at all.
Homeowners insurance is a type of protection that compensates you if your home gets damaged. Most mortgage lenders require you to have at least a certain amount of homeowners insurance as a condition of your loan.
Many lenders require you to pay for a year’s worth of homeowners insurance at closing. As a general rule, expect to pay about $35 a month for every $100,000 in home value. For example, if you buy a home worth $200,000, you’ll likely pay about $70 per month for homeowners insurance. This means that your lender might require you to pay $840 into an escrow fund at closing.
Loan Origination Fee
Loan origination fees cover the cost of processing your loan. This fee goes to your lender in exchange for underwriting your loan and creating your loan paperwork. Expect to pay about 1% of your loan's value in origination fees.
Lender’s Title Insurance
Lender’s title insurance repays the bank if you lose your home to a title claim. Unlike other types of insurance, you only need to pay for lender’s title insurance once at closing. Lender’s title insurance is separate from owner’s title insurance. Lender’s title insurance might cost up to $875.
Lead-Based Paint Inspection
If you’re buying a home built before 1979, it might have lead paint. Lead-based paint poses a significant health risk to both adults and children living in a home. This fee covers a test for lead in the home. Expect to pay around $300 for a lead-based paint inspection.
Pest Inspection Fee
You’re required to get a pest inspection before you close on your loan in some states. Pest inspections are also required if you’re buying a home with a VA, USDA or FHA loan. The average pest inspection costs about $100.
Owner’s Title Insurance
Title insurance is optional, but it can cover you in a wide variety of scenarios. A title insurance company will cover you if a previous owner of the property brings a lawsuit against you after you purchase your property.
For example, let’s say that 10 years down the road, a lien on the title is uncovered. The title insurance company will reimburse you for the amount of your policy. Title insurance costs an average of 0.5% – 1% of the purchase price.
Prepaid Daily Interest Charges
Your lender might ask you to pay any interest that accrues on your loan between closing and the date of your first mortgage payment upfront. The amount of interest you’ll accrue depends entirely on your loan amount and interest rate.
Private Mortgage Insurance
Your lender will require you to pay PMI if you put less than 20% down at closing on a conventional loan. PMI protects the lender if you default on your loan. Your lender might ask you to put down your first month’s PMI premium when you close. The exact amount you’ll pay for PMI depends on your lender, but most homeowners pay $30 – $70 each month for every $100,000 they borrow. With an FHA loan, there is an upfront mortgage insurance premium plus a monthly MIP fee for the life of the loan unless you make a down payment of 10% or more. In that case, MIP comes off after 11 years. USDA loans have an upfront guarantee fee and an annual guarantee fee that function similarly to PMI/MIP.
Property taxes are fees that you pay to your local government in exchange for public services. Property taxes fund things like public schools, roads and fire departments. The amount you’ll pay in property taxes depends on where you live and your home’s value.
Your lender might require you to pay up to a year’s worth of property tax dues at closing. You can estimate your property taxes using public records and your appraisal value. If you’re buying a home from a family member or friend, you may want to ask them what percentage they paid in property taxes last year. This will give you the best estimate of what you’ll owe in property tax closing costs.
Rate Lock Fee
Some lenders might charge you a fee to lock in your interest rate between preapproval and closing. You’ll usually pay 0.25% – 0.50% of your loan value when you lock in your rate. Many lenders offer this service for free.
A recording fee is a fee from your local city or county government to update public land ownership records. Expect to pay about $125 for your recording fee.
In some states, you must get a land survey before you can complete a home sale. A survey fee goes to the survey company that verifies and confirms your property lines before you close. Expect to pay $300 – $950 for your land survey. You may pay more if you’re buying a very large property or a property with unusual boundary lines.
Tax Monitoring And Tax Status Research Fees
This covers the cost of hiring a company to verify that your calculated property taxes are correct. This company will also notify your lender if you miss any ongoing property taxes. The cost of this fee will vary depending on where you live and which company your lender uses.
Title Search Fees
Title searches look for claims on the property you want to buy. Liens, bankruptcies or unpaid back taxes can mean that the seller doesn’t technically own the home they're selling. The title insurance company does the title search in most states, while laws dictate that real estate attorneys need to handle title searches in other states. Either way, expect to pay $200 – $400 for your title search.
Transfer taxes go to your local government in exchange for updating your home’s title and transferring it to you. Like most types of other local taxes, this fee will vary depending on where you live.
Your underwriting fee goes to your lender in exchange for verifying your loan paperwork. You might pay up to $795 in underwriting fees on your loan.
VA Funding Fee
You must pay a VA funding fee at closing if you buy a home using aVA loan. Your VA funding fee goes toward administrative costs for the VA loan program. If you put down less than 5% on your loan, your VA funding fee is equal to 2.15% of your total loan value. A 5% down payment lowers your fee to 1.5%, and a 10% down payment lowers your fee to 1.25%.
These are just a few of the most common closing costs. The specific closing costs you’ll see depend on your lender, down payment amount and loan type. Your lender will give you a document called a Closing Disclosure which lists all your closing costs at least three days before you close on your loan.
Average Closing Costs For Sellers
Buyers aren’t the only ones who pay closing costs. As the seller, you’ll also need to bring a little cash to the closing table to finish out the loan. Let’s take a look at some common closing costs sellers must pay to finalize a home sale.
Real Estate Agent Commission
Sellers usually pay for both the buyer’s and the seller’s real estate agent commissions. Real estate commissions may vary but the average rate is 5% of the total loan value. The buyer's agent and the seller's agent split the fee evenly.
If you buy a home without an agent, remember to write into your offer letter that you’re proposing a lower rate in exchange for no agent commission. Sellers consider commissions when they price their home. Without an extra commission fee, you might have more room to negotiate your home's price. If you buy a home without an agent and don’t tell the seller when you make the offer, the seller’s agent may pocket the extra money.
Recording Fees And Transfer Taxes
Local or county governments charge fees whenever a property changes hands. The seller is usually responsible for covering transfer taxes and recording fees. Sellers may have to pay fees to the county government, state government, both or neither – it all depends on your state.
Transfer taxes are usually expressed as a set number of dollars per $100,000 of the home’s appraised value.
The seller usually pays the title insurance premium. Unlike other types of insurance, title insurance doesn’t involve a monthly premium. After the seller makes a single payment during closing, you have protection for as long as you own the home. In most states, title insurance costs 0.5% – 1% of the total value of your home loan.
Escrow accounts are beneficial to the buyer and the seller. When you use an escrow account to hold funds, you can be sure that your buyer isn’t attempting to take your money and back out of the home sale. Many sellers cover 50% of any escrow fees charged because both parties benefit from using the account.
Prorated Property Taxes
When you sell your home, you must pay property taxes that accumulate up to the date of the sale. These dues can vary widely by state and municipality, so check your local county clerk’s office to see what you owe before closing. After you’re up to date on property taxes, the buyer takes over the dues.
Like your property taxes, you’ll need to make sure that you’re paid up with your HOA fees until the date of closing. The HOA fees you’ll owe at closing are usually equal to a percentage of that month’s dues. Contact your HOA to see specifically how much you’ll need to pay before you sell your home.
Credits Toward Closing Costs
If you’re selling your home in an area where competition for property is slow, you might need to take extra steps to seal your home sale. This might mean offering your buyer some money to cover their portion of closing costs. If closing credits were part of your sale agreement, you’ll need to pay for them at closing.
If the seller has an attorney at closing, they are responsible for paying their own attorney fees. Sellers usually don’t cover the buyer’s attorney fees – except as a concession. The specific amount you’ll pay in attorney’s fees depend on where you live and how many billable hours your attorney takes to finish the sale.
3 Tips For Reducing Closing Costs
Closing costs aren’t set in stone. Here are a few tips you can use to limit what you’ll pay at closing.
1. Shop Around For Lenders
As the buyer, you get to choose which mortgage company you want to work with. Don’t be afraid to take some time to shop around for lenders. Contact a few competing loan providers and ask what types of fees they charge. Choose a lender that offers low fees and competitive interest rates for lower overall closing costs.
2. Look For Duplicate Fees
When you receive your Closing Disclosure, don’t just glance at it. Go over each and every line and ask your lender what each item funds. Look for duplicate administration fees. These extra and often unnecessary fees usually have nondescript titles like “processing fee” or “funding fee.” Ask your lender what the specific difference is between each of these nondescript fees. Then negotiate a lower rate with your lender for each item. If a couple of fees are very similar, you might even want to ask your lender to exclude one.
3. Ask The Seller To Contribute
If you live in a buyer’s market, your seller might be willing to help you cover your closing costs. This is a win-win situation for you and the seller. You get to pay less at the closing table and your seller gets a faster home sale. Make sure you understand how much your seller can contribute based on your loan type and request a concession.
Final Thoughts On Closing Costs
Closing costs are processing fees you pay to your lender when you close on your loan. Closing costs on a mortgage loan usually equal 3% – 6% of your total loan balance. Appraisal fees, attorney’s fees and inspection fees are examples of common closing costs. The specific closing costs you’ll pay depend on the type of loan you have, your home’s value and your state’s laws. Sellers may also need to pay for closing costs, depending on the sale agreement.
You might be able to save on your closing costs by negotiating with your lender. You may also want to ask your seller to pay a percentage of your closing costs or take a no-closing-cost loan.
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How Much Money Do You Need To Buy A Home?
Home Buying - 5-minute read
There are many costs involved in buying a home, from the down payment and closing costs to insurance and repairs. Let’s take a look at the costs so you know what to expect and how much to save.