What Exactly Are Closing Costs and How Much Should I Expect to Pay for Them

When you start talking about mortgages you hear an awful lot about what is called closing cost. It's always mentioned when it comes time to actually buy the house closing costs what are closing costs? And how much should you normally pay for closing costs?

We're going to get to the bottom of closing costs here in this article.

Closing costs are normally considered to be any fees that come with the purchase of a home which is normally paid at the time that you close on the home during the real estate transaction. The closing or what is called the closing is the exact moment in time when the title of the property is transferred from the seller of the home to the purchaser of the home. So the closing cost becomes the extra fees that are incurred by either the buyer or the seller during this transaction.

When it comes to the amount of closing costs they vary widely across the big scope in part depending on where you live, the cost of the property you're purchasing, and even the exact type of loan that you're getting to buy the house. So we'll begin with the normal fees that are associated with closing.

The application fee - the application fee is a fee the cost for the lender to process the application. You need to ask your lender exactly what the application fee covers before you submit the application. Things that are normally included are things like a credit check for your credit score where the appraisal of the home. Some lenders charge more for an application fee some lenders don't charge anything for an application fee and in many instances, the application fee can be negotiated.

The appraisal - this is a fee that is paid to the company which does the appraisal on the home that you're wanting to buy which confirms the fair market value of the home.

The attorney’s fee - this fee of course goes to the attorney who refused the documents before the closing on behalf of the buyer or on behalf of the lender, not all states require an attorney fee.

Here’s what millennials should know about closing costs https://smartasset.com/mortgage/4-things-millennials-should-know-about-closing-costs

The closing escrow fee - pay to the title company or Escrow Company or even an attorney this fee is what is a charge for conducting the actual closing process. Because the title company or Escrow Company oversees the closing as an independent third-party they are allowed to charge a fee. there are states however that require a real estate attorney to be present at every closing.

The Courier fee - this fee of course would cover any transportation of documents back and forth during or up to the loan transaction so they can go as quickly as possible.

The credit report fee - this is when your credit report is pulled and it's called a tri-merge credit report so it has the history and the score across all three of the main credit bureaus and plays a huge role in determining the interest rate that you'll get on the loan.

The escrow deposit for property taxes and mortgage insurance fee - in many cases the buyer will be asked to put down 2 months of property tax and or mortgage insurance payment in advance at the closing that is what this fee is.

The FHA upfront mortgage insurance premium payment - in the instance that you have an FHA loan there will be a requirement for you to pay this fee of up to 1.75% of the loan amount of the mortgage. You can also roll this into the cost of the loan if it is allowed in your state and if is allowed by the FHA.

The flood determiner life of loan coverage fee - pay to a third-party this fee helps to determine if the property is located in a flood zone and if the property is found to be located in a flood zone whether you will need flood insurance. The flood insurance is paid separately from the other insurance.

Here is what first time buyers should know about closing costs https://loans.usnews.com/articles/what-first-time-homebuyers-should-know-about-closing-costs

The home inspection fee - it would be very wise for you to get your own home inspection done of the property to verify the condition of the property and to make sure that all the repairs that need to be have been made before you actually purchase the home and that's what this fee is for.

The homeowners association transfer fee - in the case that there is a homeowners association the seller will be required to pay a transfer fee that shows that the dues are paid up and in current what exactly those dudes are as well as a copy of the financial statements of the association which includes the minutes and any notices from the meetings. It is imperative that the buyer review these documents to make sure that the association has the property reserves in place for future special assessments, to see if there are any special assessments needed, including legal action, or any other items that might be of concern. It's also important that you read through the association's bylaws including all the rules and regulations.

The Homeowners insurance fees - the homeowner’s insurance of course covers any possible damages to your home and your first year’s insurance is normally paid at the closing of the home.

The lender’s policy Title Insurance fee - designed to assure the lender that you own the home this insurance helps with the lender’s mortgage to verify it is a valid lien as well as protecting the lender if there is a problem with the title. This is a separate line item from the title search though it is a similar type of process.

The lead-based paint inspection fee - do this is rather self-explanatory it is a fee that covers the cost of evaluating if there's any lead-based paint risk in the home you're purchasing.

The loan discount points fee - each point is considered 1% of your loan amount and this is a lump-sum payment that lowers your monthly payment for the life of the entire loan and it is prepaid at the very beginning of your mortgage.

The owner’s policy Title Insurance - this insurance policy helps to protect you if someone challenges your ownership of the home normally this is optional but in some cases may be required.

The origination fee - in most cases this is 1% of the total loan and it is a fee that covers the lender’s administrative costs however there are many cases of mortgages that have no origination fee.

The pest inspection fee this of course covers the cost to have a private inspector come out and look for termites and dry rot and is often required in some states and for any government loans. If there is evidence of termites the repairs can get extremely expensive alright another wood damage is found.

The prepaid interest fee - in most cases A lender may ask you to prepay any interest that is going to accrue between the actual closing and the date of the first mortgage payment and that is what this fee covers.

The private mortgage insurance payment - in the instance that you were making a down payment that is less than 20% of the purchase price of the home you will most likely have to pay what's called private mortgage insurance and if so you may need to pay the first month's payment at the closing.

Recording fees - charge by the local recording office this fee covers city and county for the recording of public land records.

The survey fee - this is paid to a survey company that you used to verify all property lines as well as shared fences and any other property disputes on the property that is being sold however it is not required in all states.

The title company title search or exam fee - hey to the title company this fee is we're doing an intensive search of the property records as well as researching the deed into your new home to ensure that no one else has a claim on the property in the form of a lien or any other legal judgment.

The transfer fee - this fee is paid whenever a title transfers from seller to buyer.

The underwriter fee - this is a fee that goes to your lender and covers the cost of all the research required to approve you for the loan.

 The VA funding fee - in the instance that you have a VA loan you will likely be required to pay a funding fee called the VA funding fee at the closing. This may be rolled into the cost of the loan if you prefer. This fee is a percentage of the loan amount from the assessment done by the VA to do the VA fund program that allowed you to get the loan. there are some borrowers however that are exempt from this fee. The percentage depends on the exact type of service as well as the total amount of your down payment. 

As far as how much closing fees are in most cases you can figure to pay between 2 and 5% of the actual price you're spinning for the home in closing cost. Any more than that could be suspect. Always ask for a line itemized statement of all your closing costs before you sign anything.

Author Bio

Will Foster | First State Bank Mortgage Senior Loan Officer

I became a mortgage lender in 2010, right after the "bubble" popped, and the mortgage industry underwent an incredible transformation. This has given me a unique advantage in the fact that I have never known anything other than the highly-regulated world we now live in.

Throughout my years of experience, my primary goal has been to keep up with the constant changes in the industry so I can help my clients investigate all of their options and maximize savings. In addition, because I specialize in Conventional, FHA, USDA, Jumbo, portfolio, and VA refinances and purchases, I can help a wider variety of individuals, families, and investors identify and secure the right loan to best suit their future interests.

The mortgage process can be a little confusing and even overwhelming these days with all of the regulations.  I guide my clients through the process from start to finish, and I try and make it as painless and hassle-free as possible.