How Much Are Closing Costs?
How much money do you really need to factor in for closing costs? Let’s find out. We’ll also take a look at some of the most common closing costs and who bears responsibility for paying them – whether it’s you or the seller.
What Are Average Closing Costs?
Closing costs include fees for things like securing the title for your new home or scheduling a home appraisal. When you close on your loan, your lender will collect money from you to cover the cost of these services. In the following examples, we’re providing ranges that are typical for the mortgage industry and may vary by lender.
Expect your closing costs to range between 3% – 6% of the total value of your loan. This means that if you take out a mortgage worth $200,000, you can expect closing costs to range between $6,000 – $12,000. Closing costs don’t include your down payment.
You may not be the only one who covers closing costs – the seller may be responsible for a portion of the closing costs, as well.
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 to 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. Meaning, 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 Are Buyer Closing Costs?
Closing costs can be broken down into several separate fees, which include an appraisal, attorney, loan origination, title search, credit reporting and escrow fees. Let’s take a look at each individual fee.
Your lender will order an appraisal through a third-party appraisal management company who 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.
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.
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 between $200 – $400 for your title search.
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 0.5% – 1% of the purchase price.
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.
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.
Private Mortgage Insurance (PMI)
Your lender will require you to pay PMI if you put less than 20% down at closing. 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 between $30 – $70 each month for every $100,000 they borrow. With an FHA loan, there is an upfront mortgage insurance premium (UFMIP) 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.
Lenders allow you to pay money up front 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.
Pest Inspection Fee
In some states, you’re required to get a pest inspection before you close on your loan. 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.
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 (FEMA) which uses the data to plan ahead for emergencies and to target high-risk zones.
VA Funding Fee
You must pay a VA funding fee at closing if you buy a home using a VA 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.
What Are Seller Closing Costs?
Sellers traditionally cover real estate agent commissions, title insurance, recording fees, transfer taxes and attorney fees.
Real Estate Agent Commissions
Sellers usually pay for both the buyer 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 offering 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.
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 between 0.5% – 1% of the total value of your home loan.
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. Here’s a complete summary of state transfer taxes and fees.
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.
Both buyers and sellers pay closing costs at the end of the home buying process. Closing costs vary by state, lender and loan type, but usually equal between 3% – 6% of the loan value. Some fees that buyers might see include appraisal fees, loan origination fees, attorney fees and more.
You can see a complete list of all of your closing costs on your Closing Disclosure. You can ask your seller to help you out with closing costs, but sellers can only contribute up to a limited percentage, depending on your loan type. Sellers usually pay for their own attorney fees, a portion of the title insurance, real estate agent commissions and transfer taxes.
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