Closing costs are, for many home buyers, a bit of an afterthought in the process to buy a home. First-time homebuyers in particular can be surprised at the bill to cover closing costs. Closing costs are a major home buying expense and if you understand the process and shop around, there are ways to reduce closing costs saving yourself cash, time, and headaches.

Your Guide to Closing Costs When Buying a Home

What are closing costs?

“Closing costs” is a bit of a catch-all term. It’s the name given to the fees and expenses associated with the last steps of buying a home, or refinancing a mortgage. The specific amount and types of closing costs you are responsible for paying will depend on where you live, the type of mortgage you select and a bunch of other factors we cover in more detail below.

Who pays closing costs?

In most situations, the buyer pays the bulk of closing costs on a real estate transaction. Sellers have some closing costs as well, often in the form of taxes and other fees.

Buyers and sellers can negotiate who pays closing costs. Asking a seller to pay part of a buyer’s closing cost is what’s known as a “seller concession.” These types of concessions are more common in a housing market where the number of sellers significantly outnumbers the number of buyers. If a seller offers to cover some of a buyer’s closing costs, it can make the offer more attractive.

There are limits to how large seller concessions can be. This depends on the type of loan you select, the size of a down payment, and whether the home is a primary residence, second home, or vacation property.

For Conventional loans, down payments of less than 20 percent generally restrict seller concessions to lower amounts, while larger down payments can command higher concessions, up to 9% of the total loan amount.

For FHA loans, seller concessions top out at 6% of either the appraised value or purchase price of the home, whichever is lower.

For VA loans, The U.S. Department of Veterans Affairs permits VA loan buyers to seek up to 4% of the home’s purchase price in seller concessions with some exclusions.

How much are closing costs?

On average, home buyers pay between 2% and 6% of the total loan amount in closing costs. So, if you are buying a $200,000 home, you would expect to pay between $4,000 and $12,000 in closing costs. The amount you pay will depend on a number of factors, including:

• Location - Depending on what state, or local municipality you are buying in, there are a number of regulations that require you to pay fees associated with real estate transactions.
• Type of Loan - Conventional, FHA, VA, USDA mortgages all have different fees and expenses.
• Home Value - Higher selling prices often incur additional expenses and drive up closing costs.
• Appraisal Cost - This fee will be higher in some regions than others.
• Lender Fees - Be sure to shop around for different rates as mortgage providers vary when it comes to cost.
• Title Insurance - The history of the home and property may require higher levels of title insurance.
• Additional Prepaid Items - A percentage of your homeowners insurance and property taxes will be paid at closing. These costs can vary widely depending on your location and home.

Are closing costs paid in cash or financed?

Closing costs are typically paid in a lump sum during the closing meeting. At the closing meeting you’ll sign all relevant paperwork and transfer funds for the down payment. Depending on the loan type you’ve selected, your lender, and your unique financial circumstances, it is possible to “roll” your closing costs into a mortgage, essentially increasing the purchase price and financing the closing costs instead of using cash to pay for them.

It is important to remember that if you do add closing costs to your mortgage, you’ll end up paying more overtime because of the added interest of the loan.

What’s included in closing costs?

The exact fees and expenses included in your closing costs will vary depending on lender requirements, the region, and type of home you are purchasing. Three days prior to closing, you are legally required to be given a closing disclosure that, among other information, will disclose all closing costs associated with your loan. It’s important to review this document carefully in its entirety so you are informed on the total cost of your mortgage.

Some of the most common closing costs are:

• Appraisal Fee: Lenders order appraisals of the property on your behalf. The appraisal determines the value of the home and ensures the loan doesn’t exceed the property value.
• Loan Origination Fee: Lenders charge a fee for underwriting and processing your loan. This fee could include an application fee, underwriting fee and “lender points” which are prepayments to the lender to lower your interest rate.
• Title Insurance: There is a range of costs included under the umbrella of title costs. Those include insurance for the lender, seller, and buyer, research, and attorney fees if necessary. Sometimes these fees are grouped together, but you will often see them itemized.
• Prepaid Expenses: You will pay a couple housing expenses in advance to provide a “cushion” and ensure bills are paid on time. The money is placed in an escrow account and sent to payees from there. These expenses include property tax premiums, homeowners insurance, and you’ll begin paying interest on your mortgage as well.
• Private Mortgage Insurance (PMI): If your down payment is less than 20% of the purchase price of the home, lenders will likely require you to pay PMI. PMI is a fee that protects the lender in the event of a default on the mortgage. The first month of PMI payments may be included in your closing costs.
• Attorney Fees: Depending on where you’re buying, real estate attorneys can be required to sign off on every sale and their fees will be noted here.
• Credit Check Fee: Lenders pull a full credit report when preparing their loan estimate.
• Tax Service Provider Fee: Lenders will work with third-party agencies to ensure there are no outstanding property taxes due on the property. This protects the lender from losing the property if the mortgage is defaulted on. This cost is then passed along to you as a fee.
• Transfer Taxes: These are one-time fees associated with the sale of real estate and depend on local municipalities.
• Property Survey Fee: A cost associated with the professional surveying of land ensuring property lines are accurate.
• Flood Determination Fee: There are a few, specific instances where you may need professional evaluation of whether your home lies in a flood plain. The fee may also include provisions for “life-of-loan” monitoring where the property is continually evaluated on the basis of flooding.
• Termite and Pest Inspection: Typically paid for by the seller, this fee is not a requirement in most jurisdictions.

How can I save money on closing costs?

Closing costs can be a formidable sum. For an expense that can total well over $10,000, many home buyers spend very little time thinking about how to minimize them. Despite this, it is possible to lower your share of closing costs in a number of ways:

Seller Concessions

You can negotiate closing costs as part of the home buying process. Motivated sellers may be willing to take on a certain percentage of closing costs, or pay for certain items like inspections or surveys. Remember there are limitations to this depending on your loan and sellers may be less interested in offering concessions in more competitive housing markets.

Price Shopping Your Loan

Homebuyers have their choice of mortgage lenders and title companies. You can shop around to avoid lenders with higher fees and ultimately select ones you trust with competitive rates and lower overall costs.

How long does it take to close on a loan?

Closing on a mortgage takes between 30 and 60 days depending on a number of factors. By far the biggest factor that can impact the length of a close is the financial readiness of a buyer. Changes to your employment, new debts, issues with credit or your mortgage application can all slow down the closing process.

Do cash buyers still pay closing costs?

Even if you won’t be taking out a mortgage, you’ll still have to pay some closing costs, although it will likely be lower than if you are financing. Cash buyers can expect to pay 1%-3% of the purchase price of the home in closing costs.

Remember, closing costs are an important consideration in the total cost of buying a home. Budget for them in the same way you would a down payment or other expenses. And be sure to review all documentation carefully and don’t be afraid to shop around for the best price and lowest fees!

The information provided here is for informational purposes. When interest rates and loan program information are included, it is for illustration purposes only and not a solicitation or quote for services. This is not an advertisement or loan estimate. Current interest rates, loan programs and qualification criteria can change at any time. If you have questions or need assistance, we can be reached using the contact information above.