Closing Costs for Buyers

When you’re about ready to buy your first house, you may be aware that you’ll need a healthy chunk of change for a down payment. But what many first-time buyers don’t realize is that they’ll also need thousands of dollars, cash-out-of-pocket, to pay for closing costs.

Here’s what you should know about closing costs for buyers.

What Are Closing Costs for Buyers?

In a nutshell, closing costs are an accumulated total of all the fees, charges, services, and professionals who are involved in your real estate transaction. 

Sadly, if you aren’t prepared and don’t have thousands of dollars extra to spend, you could end up not qualifying for your home mortgage loan.

How Much are Closing Costs?

Closing costs for buyers generally run between two and eight percent of the sales price of the home you’re buying. If you’re looking into the purchase of a $200,000 home, estimating at five percent, your closing costs will run about $10,000.

Can Closing Costs be Financed?

Closing costs, in most cases, are not included with your home mortgage loan. In other words, it’s cash you pay out-of-pocket on the day you close on the house. Paying buyer closing costs is the last thing you’ll do before getting the keys to your new home.

In some scenarios, lenders may be willing to roll your closing costs into your home mortgage loan. However, you’ll pay far more interest over time, considering the life of the loan is typically 30 years.

Can Buyers Negotiate Closing Costs with Sellers?

In a seller’s market, a trend when housing inventory is low and buyers compete, you’d be better off not asking for the seller to pay part or all of your closing costs. On the contrary, in a market where there are more sellers than buyers and sellers become more motivated, it’s possible you could negotiate with them regarding closing costs. The seller also has their own closing costs to pay, including real estate agent commissions.

How Do Home Mortgage Lenders Influence Buyer Closing Costs?

The most significant factor in considering closing costs is your lender. The lender projects closing costs based primarily on their own fees and requirements (such as private mortgage insurance, homeowner’s insurance, property taxes, etc.).

When you apply for a home mortgage loan, the lender supplies you with a list of estimated closing costs based on the amount of money you’re borrowing. Then, three days before closing, the lender provides you with a list of actual closing costs, which shouldn’t differ greatly from the original estimate. But because the lender has control of the closing costs, it’s important to shop lenders and understand their rates and fees.

When you gather closing cost estimates from at least three lenders, you then have an idea of which lender provides the greatest value. You may also find yourself positioned to negotiate with the lender for lower lender fees.

Your lender also estimates costs for things like the home inspection and appraisal. However, you’re not obligated to use the lender’s appraiser or inspector. In fact, your real estate agent may be able to refer you to professionals who charge less than what the lender estimated.

What’s Included in Closing Costs?

Application Fee

Credit Check Fee: The bank wants to see a credit score of 620 or higher and a positive payment history.

Lender fees: This includes the loan processor, underwriter, etc.

Title Check and Transfer: To ensure that there are no holds such as taxes or liens that would prevent the legal sale of the property.

Recording Fee: The local recording office charges a fee to record the public land records.

Lender’s Title Insurance: This protects the lender if anyone contests the title after the purchase is complete.

Owner’s Title Insurance: To protect the buyer if anyone contests the title after purchase.

Homeowner’s Insurance: This is to ensure the bank and the buyer that the funds are protected if the home is damaged, with some exceptions, like flood or fire insurance.

Flood or Fire Insurance: Flood and fire insurance are usually separate policies from homeowner’s insurance, which doesn’t cover floods or fires.

Pre-paid property taxes: For the first six months to a year, the bank wants to make sure that your property taxes are paid. For this reason, they charge you upfront, hold that money in an escrow account, and then pay the taxes on your behalf.

Private Mortgage Insurance (PMI): If your down payment was less than the standard twenty percent, your home mortgage lender would most likely require you to obtain private mortgage insurance — that protects them in the event that you default on your payments.

Attorney Fees: Not all states require it, and some buyers prefer it, but if there’s legal representation, the attorney fees will be enveloped into the buyer closing costs.

Pre-paid interest or points: If you decide to pre-pay a portion of your interest, which is also known as purchasing points, that will be included in your closing costs.

Rate lock fee: A rate lock fee guarantees that your interest rate will remain the same throughout the life of the loan.

Appraisal: The bank requires that the house you’re buying be appraised to verify that it’s worth the amount of money you’re borrowing.

Survey: Not always, but in some cases, especially rural areas, the borders of the land being purchased may be in question. A surveyor looks into the history of the land records, takes measurements, and redefines the property lines.

Home inspection: The lender also requires a home inspection to check the property’s plumbing, electrical, foundation, roof, heating and air, and other major systems to make sure it’s in good standing.

Escrow Agent: An escrow agent is a third-party professional who handles the documents and funding for your real estate purchase.

You may also see charges from a notary, couriers, wire transfer fees, and more.

Your Real Estate Agent Can Help You Understand Closing Costs

Ask your professional real estate agent more about what closing costs are and what you can expect to pay. Your agent may also have a preferred lender to refer you to who may have better rates.