What Are Closing Costs?
Closing costs are a combination of fees from the lender, home inspector, title and escrow, home owner’s association, and appraiser. All of these fees will be subtracted or added to the buyer or seller on the Settlement Statement.
What Are Types of Closts?
The costs of buying a home include the down payment, which is usually the largest fee. Lender fees can include loan origination fees, application fee, and discount points. Other costs will be a home inspection, appraisal, lender’s title fees, escrow fees, credit report fee, pre-paids and reserves, insurance, HOA fees, private mortgage insurance, recording fees, home owner’s insurance, and property tax.
|Types of Costs||Estimated Amount|
|Down Payment||5-20% of Sales Price|
|Lending Fees||1-1.5% of Sales Price|
|Private Mortgage Insurance||$200-$400|
The Down Payment and Earnest Money
This is the cost that most home buyers cringe about – the down payment. The down payment is the amount that takes you years of penny pinching and budgeting to save up. The money that you’ve saved up over the years also tells the bank that you are a sound borrower because you were able to save up for the down payment. The down payment is generally the highest; it can be as low as 3% and as high as 20%.
When it comes to making an offer, there is something called earnest money. Escrow will generally be holding this money. The money is saying you’re making a promise to the seller that you will buy the property under certain conditions. If you fall out of the terms that were agreed on between you and the seller, you can lose your earnest money. If the sale does move towards closing, the earnest will be deducted from the total amount that you have to bring to the table.
The Costs for You to Obtain the Loan
An average lender collects your tax returns, W2’s or 1099, pay stubs, runs your credit score, and submits your file to get a pre-approval. A great lender does all of that but also finds ways to save you money, getting pre-underwritten to win the offer, and also prepares you for challenging conditions before they come up from the underwriter on closing week. The price that you pay for a great lender is minimal compared to the kind of miracles they can work at closing. And in return, lenders tend to charge around 1-1.5% for their services.
The Home Inspection
When the home goes under contractor and pending inspection, you are advised to hire a contractor to inspect the property. Then inspector is there to tell you if there are major repairs in the near term and how you should prepare for them. I’ve seen home inspectors who charge $200 for an average home and I’ve seen prices of up to $600. The lower price range will get your home inspected very quickly. In the higher price range you will find a higher level of expertise.
You might have more fees after the home inspection. The inspector might tell you an item needs to be evaluated by a licensed professional if he thinks there may be potential issues. A roof expert can charge $100-$150 to come out and inspect the issue and give you a more in-depth answer.
I think a lot of people skip a sewer scope and some do because a house is newer so the builder didn’t use materials such as clay to run the sewer line, versus newer home builders that use PVC pipes which are less prone to root intrusions or breakage. If it’s an older home it is highly recommended that you get a sewer scope done, and these services tend to cost around $150.
Okay, so the bank wants to loan you the money for your new house. But before doing that, it needs to make sure you have made the right offer price on the house. Why, you might ask? Let’s say the bank loans to you an amount that is $50,000 dollars above market price. And within months you can’t repay the loan and they need to list and sell the property. They can’t list the property for more than the market price of $50,000. That means they just made a bad investment and lost $50,000 and money for lawyers and court fees. That is why we have an appraisal done.
Appraisals can usually range from $600 to $800 in this area. In the fast moving market, some buyers want to add the rush delivery to make their offer more competitive so it can cost $100-$150 more.
Escrow is like a referee, a neutral party in the transaction. They don’t represent the buyer or seller. The earnest money is usually held by the escrow agent and won’t release any money until they receive clear instructions from the buyer’s and seller’s agent.
They are also responsible for drafting up the settlement statement which shows the debits and credits of both buyer and seller. The settlement will show how money is transferred between buyer and seller.
The fee that they generally charge is around $900 to $1,300. Another fee that might also come up is a mobile notary fee, which is about $100. This fee is for a notary personnel to travel to your location to sign the closing documents.
Private Mortgage Insurance
If you are putting less than 20% down on a home, most likely you will have to pay for Private Mortgage Insurance, also known as PMI. The insurance protects the lender if the home buyer defaults on the loan. The fee can range anywhere from $200 to $400 per month depending on the size of the loan.
The last thing you or the bank wants is to have your home uninsured in case of a fire. Homeowner’s insurance protects you from fire, damage from windstorms, falling objects, and explosion. Lenders tend to require you to pay one year in advance at closing.
Property tax prorations is dividing the property tax between buyer and seller. The seller is responsible for property tax up until the closing date. The buyer is responsible for the taxes after that. Issues may arise if the property doesn’t close on the exact dates when property taxes are done and paid.
In King County, the first six months of property tax is due on April 30th, so that pays for those 6 months in advance. Let’s say you close on your new house on May 30th. Keeping things simple, the seller has paid for 6 months, so the new buyer will reimburse the seller for the 5 months they have paid.
This cost covers the interest charges due at closing for daily interest that accrues on your loan between the date you close on your mortgage and the period covered by your first mortgage payment. In other words, you don’t make a mortgage payment the month after you close. For instance: if you close on January 15th, your first payment won’t be until March 1st. But interest does accrue from January 15th to March 1st, so escrow will collect this expense in advance, which is at closing.
It may seem like you’re spending a lot of money to purchase a home. But knowing all of the upfront costs before you purchase the home is better than finding out after you move in and it will cost tens of thousands of dollars. By knowing beforehand, you have the choice to move forward or not.
Who pays for closing costs?
The buyer pays for their closing cost and the seller pays for their portion. The seller and buyer have similar closing costs, but the biggest difference is the seller is paying for the listing agent and the buyer’s agent commission fees.
What are some ways to lower closing costs?
You can shop for better loan fees and rates, assuming you have a great credit score. Banks would like to compete for well-qualified buyers and will offer good rates and terms to get you as a client.
Title and Escrow companies offer different prices also. Get in touch with them to see how much they charge. Title insurance has different types of coverage, so selecting an option that has less coverage that you don’t need can lower your closing costs.