What are closing costs? What should I know before getting my next loan?
What Are Closing Costs?
Closing costs are fees paid in connection with the refinance or transfer of ownership in real property. They are paid by either the buyer or the seller on the settlement date.
These fees will always vary. What you pay for one refinance or property transfer will not be the same as another. This is due to the different parties involved, different types and locations of property, the financial capacity of a buyer and many more factors.
The law requires lenders to give you a loan estimate within three days of receiving your application. This document sets out what your closing costs will be. These fees, however, are not set in stone and subject to change.
Your lender should provide a closing disclosure statement at least three business days before the closing date. This is a more reliable estimate of your closing costs. Compare it to the loan estimate you’ve received and ask your lender to explain the fees and the reasons for any changes.
What Is Included in Closing Costs?
Your costs will differ depending upon the transaction. Types of costs include:
- Credit report fees (the cost of checking your credit record)
- Loan origination fees (which consists of the cost to your lender for processing your loan)
- Attorney fees
- Inspection fees (for inspections requested by either you or the lender)
- Appraisal fee
- Survey fee (so that both you and the lender know where your property boundaries lie)
- Escrow deposit which may cover private mortgage insurance and some property taxes
- Pest inspection fee
- Recording fee paid to a county or city authority to file a record of the property transfer and/or new mortgage lien against the property
- Underwriting fee to cover the cost of processing a loan application
- Discount points (money you pay your lender to get a lower interest rate)
- Title insurance (protection for you and the lender should there be any issues with title to the property)
- Title search fees (costs incurred by the company who checks the title on the property)
These fees can range anywhere from 2% to 5% of a property’s selling price. It’s smart to get estimates from two or three lenders so that you can take these costs into consideration before making an offer. For the easiest way to compare lenders who may use different terminology to describe their fees, simply ask for a loan estimate from each.
Can I Negotiate These Costs?
Some fees, such as document, processing, service, underwriting and courier charges are open to negotiation. However, third party fees such as an appraisal or survey, are not.
If you’re worried about how much you’ll need at closing you can find a bank that doesn’t escrow real estate and homeowners insurance. Often, banks will escrow six months of real estate taxes and several months of homeowners insurance premiums. When added to the other closing costs, this can be quite a large sum.
Keep in mind, however, that you will be responsible for paying your homeowners insurance and property taxes when they’re due rather than relying on your lender to pay them for you.
Where allowed by law, you can negotiate with the seller to have them pay some closing costs normally attributed to the buyer.
Can I Add my Closing Costs to the Loan?
Most loan programs will allow for a percentage of the purchase price to go towards closing costs. The easiest way to do this is to ask for a seller credit towards the closing costs.
The seller credit means that the seller will receive a smaller ‘net’ amount at closing, however there is a way to make a seller credit more palatable to the seller. If you can qualify for a higher purchase price – say 2.5% over list – the seller won’t lose any money and you can use the seller credit towards the closing costs.
In this scenario, what you’re doing is financing your closing costs over the life of the loan.
You can also do a lender credit. Like a no-cost refinance, you agree to a higher interest rate so that the lender will pay some of the closing costs. You can potentially get a lender credit of $2,000 to $4,000 – a sizeable amount of fees.
Keep in mind, however, that should you continue paying the same mortgage over the life of the loan, you could end paying more than if you were to pay up front.
What Can I Expect?
Before closing day arrives, contact your agent to confirm that he or she has everything for the transaction to go as smoothly as possible. Pull together any paperwork that you have received and keep it on hand for easy reference on closing day.
Be prepared to take your time reading through all of the closing documents. Make sure you completely understand all of the terms you’re agreeing to. If some of the terms are missing or incomplete, don’t sign until they are resolved to your satisfaction.
Your lender will send money to the closing agent via a wire transfer and may require that you set up a new escrow account with them to pay your property taxes and homeowners insurance together with your monthly mortgage payment.
You should be advised before closing day how much money you’ll need to have for closing, so bring your checkbook with you to cover any necessary escrow and/or closing costs.
Among the many documents you’ll be signing, three of the most important documents will be the:
- Hud-1 Settlement Statement – a document which sets out the costs incurred with your closing.
- Deed of Trust or Mortgage – a document in which you agree to a lien being placed against your property as security for repayment of your loan.
- Promissory Note – a document which can be described as a legal “IOU” which sets out your promise to pay according to the terms of the agreement.
For more information on the details of buying a house, visit our First Time Home Buyer section.
Thinking about buying your first home? Before you can unlock the door to homeownership, you have to take some important first steps. From finding the perfect location to financing your purchase, shopping for your first home has challenges that go beyond curb appeal and interior features.
Some of the important steps to homeownership include:
Getting approved for a mortgage.
Choosing the right real estate agent.
Finding the right home that fits your budget.
Find the best mortgage deal now. Compare mortgages.
It’s going to be a rough summer for many wanna-be homeowners, especially the first-timers.
Buyers are facing stiff competition and bidding wars in the real estate markets that clearly favor sellers.
But that doesn’t mean you should abandon your dreams of home ownership.
Here’s what real estate agents from across the country want first-time buyers to know:
You know those HGTV shows that make home buying look fun and super fast? The buyers only look at three houses, find their dream home and get an accepted offer within their budget, all on the same day. Yeah, that’s not how it works IRL.
“After seeing three homes, most buyers say, ‘wow, that is nothing that we want. We need to see more.'” said Alex Haried, a Redfin real estate agent in Chicago.
House hunting can be long, frustrating and exhausting. Open houses and home showings can take over your weekends and creep into your week nights, and checking for new listings online can become an obsession.
Don’t bite off more than you can chew
Experts recommended getting pre-approved by a lender before you officially start your search.
That can be a good starting point in figuring out what you can afford. But just because you were approved for a set amount doesn’t mean you have to spend that much. Creating a budget can help to determine how much money you’re comfortable spending each month.
Once you’ve figured out your ceiling, take the time to research the market to find out how far your budget will go.
“Get realistic about what your money can buy,” said Dana Bull, a real estate agent in Boston.
It can also be tempting for buyers to go above their budget when they fall in love with a house. But realtors say that can be a big mistake.
“I talk to them on a personal level,” said Stephanie Collins, a real estate agent in Denver. “I tell them, ‘If you want to be downtown where you can walk to restaurants, are you going to be in over your head with the mortgage? Will you be able to dine out?'”
Play it cool at the open house
You’ve finally found your dream house. It’s perfect and you start coming up with your offer.
It helps to establish contact with the seller’s agent to start a rapport, but oversharing can create problems.
“Some of my clients are bubbly, and I have to reel them in,” said Bull. “Don’t give the listing agent too much information, you never know what they will use to negotiate against you.”
For instance, saying you’re relocating to the area for a new job or telling them your parents are helping with the some of the costs could make the agent nervous about your ability to secure financing.
“It’s almost like a job interview — buyers want to come off as easy to work with and that the process will be smooth and that they are going to get to the closing table.”
Be prepared for rejection
In many housing markets, sellers have the upper hand, which means competition is stiff — especially for first-time buyers.
“A lot of people don’t get their first offer accepted,” said Haried. Most of his first-time clients don’t make an offer until they’ve seen at least 15 homes.
While it hurts to get rejected, the process will get easier as time goes on.
Lay low once your offer is accepted
Once you have an accepted offer, your lender will start the underwriting process on your mortgage. Banks will scrutinize your finances and any big purchases might affect your qualification status. So lay off the credit cards, and don’t suddenly decide to quit your job.
Bruce Elliott, president of Orlando Regional Realtor Association, once had a client’s closing delayed over a $300 purchase.
“That purchase could push your debt-to-income level too high and you wont be able to close,” he said.
Are you buying or selling a home? We want to hear your experience. Email us and you may be featured in an upcoming story.