Closing costs is a term many first-time home-buyers find confusing. Even though you knew you’d have to have a substantial down payment and moving expenses, you may never have imagined you’d be paying out-of-pocket thousands more dollars in service fees and expenditures known as closing costs. Here are some helpful tips you need to know about closing costs for buyers.
💲 What Are Closing Costs?
Closing costs are the service fees accumulated throughout the transaction such as lender fees, escrow agents, appraisers, inspectors, clerks, and other service providers. The service providers engage in the work without direct pay with the understanding that their fee will be paid on the closing day.
👤 Who Pays Closing Costs?
In most cases, it’s the buyer who assumes the responsibility of paying closing costs. However, it’s not uncommon for closing costs to be an item discussed in negotiations. Arrangements can be made so that the seller pay part or all of the closing costs out of the proceeds from the sale as opposed to having the buyer pay thousands of dollars out-of-pocket.
💵 How Much are Closing Costs?
Closing costs can range between one percent and eight percent of the total value of the home you’re buying. Average closing costs are between two percent and five percent of the home’s value.
When you apply for your loan, your lender will supply you with an estimated total of closing costs. Three days before close or more, the lender provides a list of actual costs that will be due at closing.
📅 When Are Closing Costs Due?
At the close of sale, at the end of the transaction, at the meeting wherein the title and keys are transferred, when the lender releases the funds for the purchase, that’s when closing costs are due. The escrow agent dispenses payments to service providers, including real estate agents.
📝 Closing Costs and Home Mortgage Loans
Typically, closing costs are not included in your home mortgage loan. However, some loan programs and financial institutions have conditions in which your closing costs can be enveloped into your home mortgage loan.
💡 Understanding Closing Costs
Loan officer: When you apply for your home mortgage loan, there’s a loan officer who assists in filling out the application, gathering the appropriate documents, ordering the credit report, and submitting the loan package for review. That loan officer’s fee is the first expense in the closing costs.
Credit Report: The loan officer orders a copy of your credit report from the credit reporting agencies. Each agency charges a fee, which the bank pays up-front and then recovers at the close of the transaction in closing costs.
Loan Processor or Underwriter: When the loan is approved, the loan processors or underwriters generate the legal documents and contracts associated with the funds being borrowed by the buyer.
Escrow Agent: The escrow agent is a third-party professional who oversees the documents, funds, and processes of your real estate transaction.
Title Check: Before a house can be sold, its title has to be checked for tax hold or liens. There’s a fee for the service, and for the clerk who ordered the service.
Title Transfer: As with the title check, there’s a process for transferring the title from seller to buyer, for which there are fees and a clerk who oversaw the task.
Lawyer: Not always, but sometimes, it is required or preferred to have a lawyer review all real estate contracts.
Surveyor: The survey determines the property lines of the house you’re buying.
Appraiser: The appraisal assesses the property to provide an estimated current market value to the lender to verify that the house is worth what the borrower is asking.
Inspector: The bank also requires an inspection to deem the property free and clear of major problems, faulty systems, or pests.
Real Estate Agent: The seller’s real estate agent’s commission is included in the closing costs, from which the seller compensates the buyer’s agent.
That list is far from complete. Other costs could include homeowner’s insurance, property taxes, private mortgage insurance, and more.
When you’re not prepared and aren’t familiar with the term closing costs, you could get knocked off your rocker when you realize you owe thousands more dollars than you expected. Talk with your lender and your real estate agent for a better understanding of closing costs and what they entail.