When buying a home, it’s important that you factor in all costs when determining your budget. One important category of expenses you shouldn’t overlook is closing costs. These are the fees you’ll pay to facilitate the transaction on closing day. The closing day is the final day when the deed is transferred to the buyer, and the seller receives their check. Depending on the state you’re buying in, they can be between 2% and 5% of the purchase price. So if a home costs $250,000, then the closing costs for you will be between $5,000 and $12,500. The seller will incur some closing fees as well, but the majority tends to fall on the buyer. To help you prepare for closing day, here’s everything home buyers need to know about closing costs.
What are closing costs?
Closing costs are a series of costs attached to a home transaction to compensate all parties involved for funding, approving and ensuring the deal. They won’t be attached to the list price for the home, and until closing day, can only be roughly estimated.
Both buyers and sellers will have closing costs to pay, but the lion’s share (2% to 5% of the purchase price) will come from the buyer, while for the seller it’s less (1% to 3%). In a buyer’s market where sellers are anxious to sell, it’s possible to negotiate for them to pay a portion of the closing costs. This is far less likely to happen in a seller’s market where there’s more competition.
Seller closing costs
Some costs are clearly the responsibility of the seller. For instance, the seller must pay the full real estate commission, which is deducted from the proceeds of the sale. Sellers are also responsible for paying for their own real estate attorney if they’ve retained one. Property taxes are another one. If the seller hasn’t paid their annual property taxes, then they must credit the buyer for the number of days the seller owned the property that year. If you receive any credits, this will reduce the amount you need to bring to the closing
Buyer closing costs
Since most closing costs are associated with the mortgage, the buyer will pay the majority of them. These closing costs will come in the form of fees associated with buying the home, fees from taking out a mortgage, and fees associated with owning a home.
Below are the most common fees that every home buyer should expect.
- Loan Origination Fee – A charge from your lender for processing the paperwork of your loan
- Credit Report Fee – A charge for compiling your credit report
- Underwriter Fee – A fee for having someone assess your creditworthiness
- Appraisal Fee – A charge for running an appraisal on your home to check that its value matches the loan amount
- Home Inspection Fee – A charge for doing an inspection of the home
- Title Search Fee – A charge for uncovering whether there are any liens against the property that could hold up the sale
- A Survey Fee – A fee from a survey company to verify all property lines. Not required in all states
- Stamp Taxes – A tax on the money you’ve borrowed for the loan
- Attorney Fee – A charge for having an attorney review your closing documents (doesn’t apply in every state)
- Courier Fee – A charge for transporting the documents needed to facilitate the loan
- Escrow Deposit for Property Taxes and Mortgage Insurance – At closing, you’ll usually be asked to put down two months of property tax and mortgage insurance
- Home Owners Insurance – This will cover any damages to your home. You’ll be asked for the first year’s home insurance at the closing
- Recording Fees – A charge by your local recording office, usually the city or county, for the recording of public law records
- Transfer Taxes – A tax for passing the title from the seller to the buyer
- Pest Inspection Fees – A charge from a private company to inspect the property for termites or dry rot. This is required in some states to get a government loan
How to find out what your closing costs will be
On closing day, or a few days before, you’ll be given a bunch of important documents to sign. Among these documents will be your closing disclosure statement. This will explain who pays for what on closing day and what you’ve paid for already. Another document will be the loan estimate which will state the terms of your loan. Make sure to read both carefully to understand what you’re agreeing to.
Prior to all that you can talk with your lender and buyer’s agent to get a rough estimate of what your closing costs will be. But any estimate they give will be just that: an estimate. A major problem with estimating closing costs is that they’re different in every state. Transfer taxes can also be much higher in some states than others and can really add up to a lot.
The important thing is that you know what fees you’ll be charged. The estimate will give you a rough approximation prior to receiving your closing disclosure statement so you’ll want to have extra money on you for closing day.