Demystifying Closing Costs
in Real Estate Transactions 2023

What Are Closing Costs?

Closing costs are the various fees and expenses that both homebuyers and sellers incur during the process of completing a real estate transaction. These costs include items such as loan origination fees, appraisal fees, title insurance, attorney fees, and more.

Closing costs are separate from the purchase price of the property and are typically paid at the closing table when the transaction is finalized.

Closing costs are designed to address the diverse services, legal necessities, and administrative duties associated with transferring property ownership from the seller to the buyer. These costs guarantee that all parties engaged in the transaction remain safeguarded and that the procedure complies with all essential rules and regulations.

How Much Are Closing Costs?

Factors such as the property's geographical location and the type of loan can impact the closing costs. Typically, closing costs generally occupy approximately 2% to 5% of the home's purchase price, meaning that if you're acquiring a home valued at $300,000, you should pay within the range of $6,000 to $15,000.

It's important to note that closing costs can differ significantly from one transaction to another. Some factors that can impact the total amount of closing costs include:

• The loan type and terms
• The size of the down payment
• Local tax rates and regulations
• The use of discount points to lower the interest rate
• Whether the buyer or seller has agreed to pay certain costs

To get an accurate estimate of closing costs for a specific property, it's best to consult with a mortgage lender or real estate agent who can provide a detailed breakdown of the fees and expenses involved.

How do closing costs work?

Closing costs encompass the various fees and expenses that arise during the completion of a real estate transaction. To better understand how closing costs work, let's walk through the closing cost process:

Loan Estimate: The lender has a legal obligation to provide you with a Loan Estimate within three business days after you have applied for a mortgage. The profile offers an estimation of the closing costs, encompassing both the fees linked to the mortgage and various third-party services.

Negotiations: Both the buyer and the seller can negotiate who pays certain closing costs. For example, a buyer may request that the seller contributes to the closing costs as part of the purchase agreement.

Choosing Service Providers: As a buyer, you have the right to choose certain service providers, such as title companies, attorneys, and inspectors. Shopping around and comparing fees can help you save money on closing costs.

Finalizing Closing Costs: Just prior to closing, you will receive a Closing Disclosure detailing your mortgage terms and closing costs, enabling you to examine and analyze the fees to the initial Loan Estimate. If you notice any significant differences, it's important to discuss them with your lender before closing.

Closing: At the closing table, the buyer and the seller will review and sign the necessary documents to finalize the transaction. The closing costs are typically paid at this time, either by cashier's check, wire transfer, or being rolled into the mortgage.

Throughout the closing cost process, it's essential to stay in communication with your lender and real estate agent. They can help you navigate the various fees and expenses, negotiate with the seller, and ensure a smooth transaction.

Who Pays Closing Costs?

Both the buyer and the seller are responsible for paying closing costs in a real estate transaction, although the specific fees each party is responsible for may vary. Generally, the buyer is responsible for costs related to obtaining the mortgage, while the seller is responsible for costs associated with transferring the property title and other related expenses.

What are seller concessions?

Seller concessions are when the seller agrees to contribute towards the buyer's closing costs. This can be done as a percentage of the purchase price or as a fixed amount, and it can be a powerful negotiating tool for buyers, especially in a competitive market. Seller concessions can help make a property more affordable for buyers by reducing their upfront costs.

Give An Example Of Seller Concessions In Practice

Imagine a home is listed for $250,000, and the buyer's estimated closing costs are $10,000. The buyer may offer the seller $255,000 for the property, but request $5,000 in seller concessions to help cover the closing costs.

In this scenario, the seller would effectively receive $250,000 for the property, while the buyer would have $5,000 less to pay out-of-pocket for closing costs.

A breakdown of seller concessions limits for conventional loans

For conventional loans, the limits on seller concessions depend on the down payment and the property type:

• If the down payment is less than 10%, the maximum seller concession is 3% of the purchase price.
• If the down payment is between 10% and 25%, the maximum seller concession is 6% of the purchase price.
• If the down payment is 25% or more, the maximum seller concession is 9% of the purchase price.

A breakdown of seller concessions limits for FHA Loans

For FHA loans, the maximum seller concession allowed is 6% of the purchase price.

A breakdown of seller concessions limits for VA Loans

For VA loans, the maximum seller concession allowed is 4% of the loan amount, plus reasonable and customary loan discount points.

A breakdown of seller concessions limits for USDA Loans

For USDA loans, the maximum seller concession allowed is 6% of the purchase price or the appraised value, whichever is lower.

How Much Are Closing Costs For A Buyer?

In this section, we'll provide a more detailed breakdown of the various closing costs that buyers may encounter during a real estate transaction. Keep in mind that not all buyers will face every cost listed, and the specific fees can vary depending on the location, lender, and other factors.

Application Fee

The lender imposes an application processing fee to handle your mortgage application. This fee typically falls within the range of $250 to $500, and there is a possibility of negotiation or even exemption in certain circumstances.

Appraisal

An appraisal refers to a licensed appraiser's assessment of the value of a property. Lenders mandate appraisals to verify that the property's worth aligns with the loan amount. The expense associated with an appraisal typically falls within the range of $300 to $500.

Attorney Fees

In some states, an attorney is required to review and oversee the closing process. Attorney fees can vary widely but often fall between $500 and $1,500.

Discount Points

Discount points are optional fees paid to the lender to reduce the interest rate on your mortgage. One discount point typically costs 1% of the loan amount and reduces the interest rate by 0.25%. For example, on a $200,000 mortgage, one discount point would cost $2,000 and lower the interest rate by 0.25%.

Loan Origination Fee

This fee covers the lender's administrative costs for processing your mortgage. The loan origination fee is usually expressed as a percentage of the loan amount, often between 0.5% and 1%.

Lender’s Title Insurance

Lender's title insurance protects the lender in case there are any issues with the property's title, such as liens, ownership disputes, or other legal problems. This one-time fee can vary but typically ranges from $500 to $1,000.

Lead-Based Paint Inspection

For homes built before 1978, a lead-based paint inspection may be required to ensure the property is safe. The cost of this inspection usually ranges from $200 to $400.

Homeowners Association Transfer Fee

In the case of a property belonging to a homeowners association (HOA), there might be a fee imposed for transferring ownership records. This fee can vary but typically ranges from $100 to $500.

Homeowners Insurance

To mitigate potential risks linked to property damage or loss, lenders demand borrowers with homeowners insurance. The average annual premium for homeowners insurance is approximately $1,200.

And the homeowners insurance cost takes into account multiple factors, including the value of the property, its geographical location, and the extent of coverage.

Home Inspection Fee

A home inspection is an assessment of the property's condition conducted by a licensed inspector. The inspection helps identify any potential issues, such as structural problems or necessary repairs. The cost of a home inspection typically ranges from $300 to $500.

Closing Fee

This fee covers the cost of the closing agent or escrow company that handles the closing process. The closing fee can vary, but it often ranges between $500 and $1,000.

Courier Fee

A courier fee covers the cost of transporting documents between parties during the closing process. This fee is usually around $50 to $100.

Credit Reporting Fee

This fee covers the cost of obtaining your credit report, which lenders use to assess your creditworthiness. The credit reporting fee is typically around $30 to $50.

Escrow Funds

To pay for upcoming property taxes and homeowners insurance premiums, it may be necessary for you to deposit funds into an escrow account upon closing. In spite of variations in the exact amount, it generally corresponds to several months' expenditures.

FHA Mortgage Insurance

If you're using an FHA loan, you'll need to pay an upfront mortgage insurance premium (MIP) at closing, which is 1.75% of the loan amount.

Additionally, you'll be required to pay an annual MIP, which varies based on the loan amount, loan term, and loan-to-value ratio. This annual premium is typically divided into monthly installments and included in your mortgage payment.

Flood Certification

Lenders require a flood certification to determine if the property is located in a flood zone, which would necessitate flood insurance. The cost of flood certification is usually between $15 and $50.

Prepaid Daily Interest Charges

At closing, you'll be required to pay interest on your mortgage from the closing date until the end of the month. The amount will depend on your loan amount and interest rate.

Private Mortgage Insurance (PMI)

If your down payment is less than 20% of the home's purchase price, you'll likely need to pay private mortgage insurance. PMI protects the lender in case you default on the loan.

The cost of PMI varies based on the size of your down payment and credit score, but it typically ranges from 0.3% to 1.5% of the original loan amount per year.

Property Tax

At closing, you'll be required to pay a prorated portion of the property taxes for the current year. The exact amount will be determined by the property's value and the tax rate applicable to the local authorities.

Pest Inspection Fee

To check the absence of wood-destroying insects like termites or carpenter ants, a pest inspection is carried out. The associated cost for this inspection generally varies from $75 to $150.

Owner’s Title Insurance

Owner's title insurance is an optional policy that protects the buyer in case there are any issues with the property's title. The cost varies based on the property's value and location but is typically between $500 and $1,000.

Tax Monitoring And Tax Status Research Fees

These fees cover the cost of monitoring your property's tax status and ensuring that your property taxes are paid on time. The cost is usually around $50 to $100.

Title-related costs

Title-related costs include fees for title searches, title examinations, and other services required to ensure a clear title. These fees can vary but generally range from $200 to $400.

Transfer Tax

During the process of property ownership transfer, certain states or local governments enforce transfer taxes. The precise amount of these taxes is contingent upon factors such as the value of the property and the prevailing tax rate in the respective locality.

Rate Lock Fee

Lenders may assess a rate lock fee to guarantee a fixed interest rate for a designated period. The cost of this fee typically ranges from 0.25% to 0.5% of the total loan amount.

Recording Fee

This fee is charged by the local government to record the transfer of property ownership in the public records. The cost can vary but generally ranges from $25 to $250.

Survey Fee

A survey fee covers the cost of verifying the property's boundaries and dimensions. This fee can vary based on the property's size and complexity but typically ranges from $250 to $500.

Underwriting Fee

This fee covers the cost of the lender's underwriting process, which involves verifying your income, assets, and creditworthiness. The underwriting fee usually ranges from $400 to $600.

VA Funding Fee

If you're using a VA loan, you'll be required to pay a funding fee at closing. The funding fee varies based on your down payment and the type of loan (first-time use or subsequent use), but it generally ranges from 1.4% to 3.6% of the loan amount.

Government Recording Fees

To officially register and preserve documents related to real estate transactions in publicly accessible repositories, local authorities impose government recording fees.

Typically varying between $50 and $150 based on jurisdictions, the fees contain expenditures related to the processing and preservation of crucial documents, such as deeds.

To obtain an estimate tailored to your particular transaction, it is advisable to consult your real estate agent, title company, or lender.

How Much Are Closing Costs For A Seller?

This section aims to provide sellers with a more detailed breakdown of the various closing costs that may arise during a real estate transaction. Keep in mind that not all sellers will face every cost listed, and the specific fees can vary depending on the location, buyer negotiations, and other factors.

Title Insurance

Title insurance protects both the buyer and the lender from issues related to the property's title, such as liens, ownership disputes, or other legal problems. The seller is often responsible for purchasing the owner's title insurance policy, which typically costs between $500 and $1,000.

Escrow Fees

Escrow fees are charged by the escrow company or closing agent to handle the closing process, including the transfer of funds and the recording of documents. The cost of escrow fees can vary but often ranges between $500 and $1,000. In some cases, the buyer and seller may split these fees.

Prorated Property Taxes

Sellers are responsible for paying property taxes up to the date of closing. At closing, the seller will pay a prorated portion of the property taxes for the current year, which the buyer will then take over.

Attorney’s Fees

In certain jurisdictions, the careful examination and supervision of closing proceedings demand the involvement of an attorney whose costs associated can vary significantly, typically ranging from $500 to $1,500.

Credits Toward Closing Costs

In some transactions, the seller may agree to provide a credit toward the buyer's closing costs, also known as seller concessions. This can be a percentage of the purchase price or a fixed amount and can be negotiated as part of the purchase agreement.

HOA Fees

If the property is part of a homeowners association (HOA), the seller may be required to pay any outstanding HOA fees or assessments at the time of closing.

Real Estate Agent Commission

In most cases, it is the seller's responsibility to cover the commission for both their real estate agent and the buyer's agent. The total commission, which is divided between the two agents, typically falls within the range of 5% to 6% of the sale price.

Recording Fees And Transfer Taxes

Recording fees are charged by the local government to record the transfer of property ownership in public records. The cost can vary but generally ranges from $25 to $250.

Transfer taxes, which are imposed by some states or local governments when a property changes ownership, will also be the seller's responsibility. The amount varies based on the property's value and the local tax rate.

How To Reduce Closing Costs

Shop Around For Lenders that offer discounts

By exploring multiple lenders, you can discover different fee structures and potentially secure lower closing costs. Feel free to negotiate fees and inquire about discounts, as some lenders may be flexible in adjusting their charges to attract your business.

Ask The Seller To Contribute

Buyers have the option to engage in discussions with sellers regarding the possibility of the sellers covering a portion or all of the closing costs. This arrangement, known as a seller concession, can be included as a provision within the purchase agreement.

It is essential to consider that there may be limitations on the allowable amount of concessions, depending on the type of loan.

Apply for down payment assistance

Down payment assistance programs, offered by various government agencies and nonprofit organizations, can help cover closing costs for eligible first-time homebuyers. These programs may provide grants, low-interest loans, or other financial assistance to help reduce closing costs.

Use a no-closing-cost loan

Some lenders offer no-closing-cost loans, which roll the closing costs into the loan amount or charge a slightly higher interest rate in exchange for covering the closing costs. While this option can help reduce upfront costs, it may result in higher monthly payments or a higher total loan cost.

Schedule the Closing at the End of the Month

By scheduling the closing at the end of the month, you can reduce the amount of prepaid interest you'll have to pay at closing. This can help lower your overall closing costs.

Roll Closing Costs Into Your Mortgage

Explore the option of financing your closing costs by adding them to your mortgage balance.

This allows you to spread out the costs over the life of the loan, reducing the need for upfront payment. However, it's important to consider that incorporating closing costs into your mortgage may result in higher monthly payments.

Consider additional ways to reduce closing costs:

• Request a lender credit in exchange for a higher interest rate.
• Take advantage of special programs or discounts for veterans, first-time homebuyers, or certain professions (such as teachers or firefighters).
• Look for a home warranty provided by the seller, which can help offset repair costs after the purchase.
• Work with an experienced real estate agent who can help negotiate lower fees and costs as part of the transaction.

FAQs about Closing Costs

How can I estimate closing costs?

There are several methods to estimate closing costs, such as utilizing online calculators, discussing with your lender, or seeking advice from a real estate agent.

These knowledgeable professionals can furnish you with a reliable estimate detailing the anticipated closing costs tailored to your specific transaction. It's important to note that the actual costs may differ from the initial estimates provided.

When do I pay closing costs?

Payment for closing costs is typically made upon closing, occurring when the seller conveys the property ownership to the buyer. Occasionally, specific closing costs, such as the home inspection fee or appraisal fee, may be paid in advance of the closing date.

How long does it take to close on a mortgage?

The time it takes to close on a mortgage can vary, but on average, it takes 30 to 45 days from the time you submit your loan application to the closing date. This timeline can be influenced by factors such as the type of loan, the efficiency of the underwriting process, and the readiness of both the buyer and seller.

Can closing costs be included in the loan?

In some cases, closing costs can be included in the loan through a no-closing-cost loan or by rolling the closing costs into the mortgage. This can help reduce upfront costs but may result in a higher monthly payment or increased overall loan cost.

Why Are Closing Costs Necessary?

Closing costs are necessary because they cover the various services and fees associated with the home buying and selling process. These costs ensure that the property's title is clear, that the lender's investment is protected, and that all parties involved in the transaction are compensated for their services.

Are Closing Costs Tax Deductible?

Some closing costs may be tax-deductible, such as mortgage interest, property taxes, and discount points. However, most closing costs are not tax-deductible. It's important to consult with a tax professional to determine which costs may be deductible for your specific situation.