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It may surprise you to learn you need more than your down payment when buying a home. Mortgage Lenders and third-party companies charge costs to close on your loan.
A lot of work goes into helping you buy a house, and it comes at a cost. Knowing what the costs are and how you can lower them is important when buying a home.
What Are Closing Costs?
There’s a lot of work behind the scenes when you buy a house and take out financing. Closing costs cover this work so lenders can continue writing mortgages.
Closing costs typically cover things like processing your loan, appraisal, title work, mortgage insurance, and your attorney (if applicable).
Closing Costs Explained
It may seem like it’s impossible to buy a house when you have to pay closing costs too, but they are what makes it possible to buy the house. Lenders must order services from several vendors to process your loan.
They need an appraisal to ensure the home is worth enough to lend the amount you requested and a title search to make sure the home is clear of any liens.
Lenders must also do their due process in evaluating your ability to afford the loan by looking at your income documents, asset statements, and credit score, which of course, costs money.
>> More: Best Online Mortgage Lenders
How Much Are Closing Costs?
Every lender charges different closing costs, but expect to pay 3% – 5% of the loan amount or $3,000 – $5,000 for every $100,000 you borrow.
Don’t let those numbers freak you out, though. There are ways to decrease them.
- Shop around and compare your options. Each lender charges different fees
- Improve your credit score, so lenders don’t charge mortgage origination fees or high processing fees
- Ask if you can use your own appraiser or title company if you know a company that charges less
- Negotiate the closing costs with the lender (many will negotiate)
Who Pays Closing Costs?
Buyers and sellers pay closing costs, but buyers typically bear the brunt of the costs. But there are ways to get help:
- Ask the seller to help you cover your closing costs (there are limits)
- Negotiate a no closing cost loan with the lender (you’ll pay a higher interest rate for them to cover the closing costs)
- Get gift funds from family to help with the costs
If you get help from the seller, understand the limits set by each loan program:
Conventional loans allow sellers to help with closing costs, but they limit the amount they can help by the size of your down payment.
- 10% or less down – Sellers can contribute up to 3% of your loan amount for closing costs
- 10% – 24.99% down – Sellers can contribute up to 6% of your loan amount for closing costs
- 25%+ down – Sellers can contribute up to 9% of your loan amount for closing costs
These numbers are for primary residences. If you buy a second home, the percentages are the same, but the lowest down payment is 10%, and for investment homes, sellers can only provide up to 2% of the loan amount.
For VA Home Loans, sellers can pay 100% of the veteran’s allowed closing costs PLUS up to 4% of the loan amount in seller concessions which can cover homeowner’s insurance, taxes, and the VA funding fee.
The FHA allows sellers to contribute up to 6% of the sales price or appraised value, whichever is lower.
The USDA also allows sellers to contribute up to 6% of the sales price to help buyers with closing costs.
How Much Are Closing Costs for a Buyer?
Closing costs vary by situation, but on average, here’s what buyers pay.
If the home is in a homeowner’s association, you’ll pay annual assessments. If you set up an escrow account, you can pay them monthly, but some associations require the first year paid in full at the closing.
Some (not all) lenders charge an application fee. If the lender itemizes fees, you may see this fee, but remember, you can negotiate it.
All buyers pay for a home appraisal. It can vary from $300 – $500 or more depending on where you live and the size of the home.
If you’re assuming a loan from the seller, you’ll pay a fee to the lender. Conventional loans cost up to $1,000 or 1% of the loan amount. FHA loans charge $500 and VA loans charge $300.
Real Estate Attorney Fees
If you hire a real estate attorney (you should), you’ll pay $500+ for their services to help you through the real estate transaction.
The escrow or title company will likely charge a closing fee to handle the administrative costs of closing the loan, sending the documents for recording, and facilitating the wire transfer.
If your documents need to be overnighted or sent via courier to the lender or title company, there will be a fee, usually around $30.
Credit Report Fee
All lenders pull credit to process your loan. They pass the charge along to you, which is usually $25+.
Discount points are an optional fee. If you want a lower interest rate, you can pay a point that will lower your rate by around 0.25%, but this varies by lender.
One point is 1% of your loan amount and is prepaid interest. Lenders collect the interest upfront rather than in the interest rate.
If you’re setting up an escrow account for taxes and insurance, you must establish the account at closing.
At a minimum, you’ll need 2 months of each charge in the account, but depending on the timing, you may find that you must stock the fund with 4+ months of taxes, so you have enough money available when the tax bill is due.
Home Inspection Fee
Lenders don’t require a home inspection, but it’s a good idea. You’ll know what’s wrong with the home and be able to decide if you still want to buy it.
The cost of a home inspection, like the appraisal, varies by area and home size, but expect to pay $500 – $1,000.
Loan Origination Fee
The mortgage origination fee is a lender charge. They don’t charge it on every loan but expect an origination charge if you have any risky factors or complicated loan.
They are charged in points or a percentage of your loan amount. One point equals 1% of your loan or $1,000 for every $100,000 you borrow.
Mortgage Broker Fee
Mortgage brokers must charge for their services since they are the middleman.
They don’t make money on interest like the lender does, so they charge a mortgage broker fee of 0.5% – 2.75% of the loan amount.
The amount you pay varies based on the complexity of your loan and how much the broker makes from the lender for sending you to them.
If you’re putting down less than 20% on the home or taking out a government-backed loan, you’ll owe mortgage insurance.
If you have an escrow account, you may need to put up to 2 months of mortgage insurance in it at the closing.
>> More: What Is Private Mortgage Insurance?
Depending on the time of year that you close, you may have to pay property taxes at the closing, even if you aren’t setting up an escrow account.
Each title company has rules regarding when they require real estate taxes to be paid at the closing.
If your closing is close to the due date of the taxes, be prepared to pay the semi-annual real estate tax bill.
Pest Inspection Fee
Pest inspections aren’t required, but again, they are recommended, especially if the home is in a risky area for termite damage. Pest inspections usually run about $100.
Prepaid Daily Interest Charges
Since you pay mortgage interest in arrears, you’ll pay the remaining days of interest in the month that you close.
For example, if you close on October 15th, your first payment isn’t due until December 1st. The December 1st payment covers November’s interest, but you must cover the interest from October 15 – 31st at the closing.
Rate Lock Fee
Most lenders charge a fee to lock the rate. Once you lock it, you get to keep that rate even if rates increase. This typically applies to fixed-rate mortgages.
If you bought a float-down rate, you’ll pay a little more but have the option to take advantage of lower rates if rates drop after you lock.
Most lenders charge 0.25% – 0.5% of the loan amount for the rate lock fee.
The county must record your deed, which typically costs around $125.
Title Search Fees
All lenders require a title search. This tells the lender the seller owns the home with no liens except their current mortgage. The title search fee can cost between $200 – $400.
All lenders require lender’s title insurance. This protects the lender should someone try to stake a claim to the property or claim a lien the title search missed. The insurance covers the legal fees and any losses.
You also have the option to buy owner’s title insurance. It’s a one-time fee that covers you as long as you own the home. It provides the same protection for you that the lender’s policy provides lenders.
Sellers usually pay the lender’s policy, and buyers pay the owner’s policy premium. On average, premiums cost 0.5% – 1% of the loan amount, but it varies by title company.
Your local county may charge transfer taxes to handle the cost of transferring the property and updating the title.
Lenders typically charge an underwriting fee. This covers the cost of determining if you qualify for the loan, clearing your conditions, and handling all aspects of evaluating the property to ensure it’s good enough collateral.
The fee varies by lender but can be as much as $800.
VA Funding Fee
The Department of Veteran Affairs charges an upfront VA funding fee on all loans. First-time users pay 2.3% of their loan amount if they don’t make a down payment.
If you make a down payment, the funding fee goes down, but the fee increases if you use your benefits again. Your seller can help cover the cost of the fee.
>> More: Best VA Mortgage Lenders
How Much Are Closing Costs for Sellers?
Sellers pay closing costs, too, including:
- Attorney fees
- Escrow charges
- HOA dues
- Real estate taxes
- Real estate agent commission
- Lender’s title insurance
- Recording fees
The fees vary based on the area and the individual factors with the home, but sellers pay 8% of the home’s price on average. This varies considerably depending on how much the real estate agent commission is.
How Can Home Buyers Avoid Closing Costs?
Buyers can avoid closing costs by asking sellers for help, negotiating with the lender, or wrapping the closing costs into their loan. Some lenders even offer a no closing cost loan, but they come with a higher interest rate.
Bottom Line: What Are Closing Costs When Buying a Home?
Prepare yourself for the closing costs when you buy a home. They are in addition to the down payment and can be as much as 5% of the sales price.
There are ways to get help, but most people come to the closing table with at least a little money for closing costs.