Buying a house is one of the biggest financial decisions a person can make in their lifetime – and closing costs are among the most crucial expenditures to be considered by those engaging in the home buying process, and often come as a surprise to first-time buyers.
Closing costs are the additional expenses that incur to a buyer apart from the sales price of the house.
Home buyers can anticipate closing costs to range between two and eight percent, but can estimate between four and six percent of the sales price of the property to be most prepared.
It’s usually the buyer who pays closing costs on a property, but it’s not unheard of for a buyer to negotiate closing costs with the seller. In some scenarios, the seller may agree to pay a portion or all of the closing costs.
Lenders do not generally include closing costs in a home mortgage loan. However, there are some exceptions where lenders will roll closing costs into the buyer’s loan, but for a higher interest rate and different conditions.
Shopping Lenders for Closing Costs
Lenders are the ones who determine closing costs, in large part because it’s the lender who accounts for the majority. When buyers talk with a lenders about pre-qualifying for a home mortgage loan, they can ask for a statement of estimated closing costs. These estimates differ from one lender to another.
Armed with at least three estimates, a buyer can then compare rates and set themselves up to be in a position to negotiate those costs with the lender to get the best rates.
Closing Costs for Home Buyers
- Application Fee (or) Loan Organization Fee: The application fee is the cost that the home mortgage lender charges for registering with their services and processing your application. It can also sometimes include costs like credit check fee, appraisal fee, and other administrative costs. The underwriting fee may also sometimes be included as a part of the application fee, where an underwriting fee is nothing but the cost incurred for evaluation of the buyer’s loan application. Any buyer can discuss with the lender to understand the expenses that are included in the application fee. A buyer can negotiate with the lender to potentially lessen the application fee.
- Credit Report Check: It is important for any home buyer to get a detailed credit report from the credit bureau to identify their current credit score, which should be 620 or higher to purchase a home. This report not only consists of the buyer’s credit score but also mentions credit history, demonstrating to the lender that the buyer is able to make the payments without over-extending themselves.
- Attorney Fee (or) Legal Costs: Attorney fees are common costs involved in closing a home buying transaction. Closing of any home buying transaction involves the service of an attorney or a real estate agent and also involves corresponding legal charges. So, buyers must also consider attorney fees and legal expenses as a part of closing costs.
- Home Inspection Fee: Home mortgage lenders inspect the house to verify the condition of the property and checks for any repairs, modifications, etc. They also check for the presence of pests in the property’s structures before approving and releasing the home mortgage loan. In order to perform this inspection, the home mortgage lenders charge the borrowers or buyers a nominal home inspection fee which becomes a part of closing costs.
- Discount Points: Discount points are a fee that buyers sometimes choose to pay in advance in order to lower their monthly payments. This entirely depends on the buyer’s financial appetite. In such cases, the home mortgage loan providers offer exceptions to such buyers by charging an appropriate discount point processing fee.
- Property Appraisal Fee: The appraisal fee is the amount paid to the home appraiser to confirm the fair market value of the house. The appraiser uses a comprehensive market analysis, a visual inspection of the home’s condition and aging, and determines what the house is worth at the time of the appraisal. The appraisal and inspection are both requirements of the lender.
- Property Survey Fee: Surveys aren’t always required if a property’s boundaries are clearly defined. But in some rural areas where property lines are in question, a surveyor makes the determination.
- Title Search Fee: A title search proves that the house for sale doesn’t have any liens or holds. If there are liens or tax holds on the property, the seller most rectify those before the sale is complete.
- Escrow deposit: When buying a house, the lender opens an escrow account on your behalf, which is sort of like a savings account. In it, paid in your closing costs, are several months’ worth of property taxes, homeowner’s insurance, and private mortgage insurance, if applicable.
- Recording Fee: The recording fee is the amount charged by the government authorities and recording establishments in order to enter or record the public land records and register your purchase. This is a mandatory fixed expense that any buyer needs to consider in closing expenses.
- Postage/Courier Charges: Banks and other home mortgage loan providers use professional and trusted courier services to ensure data security and protect sensitive information. These courier charges and postage fees are to be covered by the buyer in the closing costs.
Additional Closing Costs for the Home Buyers
Apart from the aforementioned expenses that are included in buyer closing costs, the following are some other expenses that a buyer should be aware of before planning to procure a house.
- Property Tax: Tax on the property that a buyer has to pay to the government.
- Homeowner’s Insurance: Homeowners insurance is required by the lender so that in the event of a natural disaster, the property will be covered. Some buyers are also required to purchase additional policies such as flood or fire insurance. Furthermore, where buyers have lower down payments than the standard 20 percent, they may need to buy private mortgage insurance (PMI), which protects the lender in the event that the buyer defaults on payments.
Conclusion
Closing costs for buyers are expensive and can come as quite the unpleasant surprise. In fact, if a buyer is prepared to pay thousands, potentially tens of thousands, of dollars in closing costs, they could find themselves unable to make the purchase. However, when there’s a clear understanding of what closing costs are, and how much money is needed, buyers are empowered to move forward in their dream of homeownership.
Talk with your professional buyer’s real estate agent for a more in-depth understanding of what closing costs are, how you can negotiate with lenders and sellers, and how you may be able to save money on your buyer closing costs.
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