Somebody's gotta pay 'em. Who's it gonna be?
Many hands are in the cookie jar that is a new mortgage. Appraisers, inspectors, agents, title insurers, escrow
companies, insurance companies, credit bureaus; all provide a very necessary piece of a real estate transaction, and all expect
to be paid. And don't forget your lender.
Most closing costs are settled at closing and are collected only if/when your loan closes. Appraisals and inspections are
often paid upfront, though not always. So what happens when closing day comes? Who pays the check?
Each state is a bit different, but generally, buyers are responsible for certain items. Sellers too. Let's not worry about the
seller's side. You're the buyer and this is about planning for YOUR new home purchase.
Typical Buyer's Closing Costs
- Lender fee / Origination
Varies from lender to lender. Could be a flat fee or percentage
of your loan amount (i.e. origination point).
- Discount points / rate buydown
Varies from lender to lender. Fee paid to get a better rate.
Usually $375 to $500 depending on property type, location, and loan program.
Lenders typically do not require home inspections, but it is always a good idea to get one. Some loan programs require specific inspections like termite, well, septic, etc...
- Credit Report
Credit reports, updates, supplements, etc... will vary, but less than $100 is typical.
- Title/Escrow Company Fee
Fees paid to the title company for preparing documents, searching title for liens, closing the loan, etc... Varies widely from state to state.
- Title Insurance (Lender's Policy)
Insures the lender against any liens not discovered in the title search should they show up in the future.
- Title Insurance (Owner's Policy)
Insures the buyer against any liens not discovered in the title search should they show up in the future. Often paid by the seller.
- Homeowner's Insurance
One year premium paid at closing.
- Escrow / Impound Account
Not really a cost, but still a very real part of your new mortgage. Establishes an escrow account with your new lender to pay future homeowner's insurance premiums and property taxes.
The seller can pay ALL of these for you, but you have to ask. Conventional loans allow the seller to contribute 3% of the purchase price towards the buyers closing costs. 3% should cover most, if not all, of the costs listed above. If you are buying with an FHA or VA loan, you can ask for more. 4% will almost surely cover everything, however FHA will allow up to 6%.
Remember, it doesn't hurt to ask. The seller will usually counter offer if you are asking for too much. Also, the seller keeps whatever isn't used, so if you ask for 6% and the costs come to 4%, the seller keeps the remaining 2%.
If you don't negotiate seller paid closing costs into your purchase, you'll be asked to bring the closing cost amount to closing in addition to your down payment. On a $200,000 purchase this can be an additional $6,000 with a conventional loan. Wouldn't you rather use that money to furnish your new home or make improvements?
Next: FHA Mortgage Insurance Premiums