After countless days or months of open houses, competitive bids, and phone calls with your real estate agent, you find your potential dream home. With your agent’s help, you and the seller agree to a final sale price. Then, the next phase of the home-buying process begins. What’s next? Budgeting for the list of closing fees you’ll need to pay to finalize the purchase of your home. The mortgage origination fee, the inspection fee, a survey fee, and the list goes on. What do these charges represent, and why must buyers pay them?
Who Pays Closing Costs?
Sellers and buyers pay for closing costs. Buyers can expect to pay loan origination fees and title insurance fees, while sellers pay the real estate agent commission and prorated property taxes from the beginning of the year through the date of sale. Both buyers and sellers may pay transfer taxes. Buyers may need to pay some of the seller’s closing costs for short sales or foreclosures.
How Much Are Closing Costs?
In addition to saving money for a 20% down payment, prospective buyers must also save for closing costs. First-time homebuyers may downplay or overlook the total cost of added expenses, then grow surprised during closing. Closing costs can amount to thousands of dollars, though the amount varies by region. For example, buyers in California should expect to pay equal to 1% of the purchase price in closing costs, while New York buyers pay closer to 3.1%. The following list more specifically highlights individual
#1 Mortgage Origination Fees
An origination fee is a bill the buyer must pay their mortgage lender to close the loan. Lenders may charge a flat amount for origination fees or a percentage of the loan balance, ranging from 0.5% to 1%.
The origination fee is a lump sum representing various services the mortgage lender provides. The lender may itemize the charges on the settlement sheet. Mortgage closing costs typically consist of a document preparation fee, escrow fee, appraisal costs, administrative fees, a credit check, and processing fees.
#2 Points, PMI, and Prorated Interest
To secure a lower interest rate, borrowers may agree to pay points upfront. Points equal a percentage of the loan balance. The lender may include the charge for points in your origination fees.
Buyers with a down payment of less than 20% may also pay a private mortgage insurance (PMI) premium at closing. This mortgage insurance policy must remain in effect until the homeowner acquires at least 20% equity in their home.
Mortgage lenders may also prorate the interest for the first month of your loan and require you to pay this amount at settlement.
#3 Title Insurance Fees
Another portion of the closing fees goes toward purchasing a title insurance policy. Title insurance ensures you don’t buy a home with an unknown claim against it by guaranteeing that the property is free of liens or other ownership claims. Most mortgage lenders require borrowers to acquire title insurance. Should the title insurance provider discover any outstanding issues, buyers and sellers must work to resolve the matter before closing.
In some states, title companies may also administer the real estate closing, acting as a neutral party. The buyer generally chooses and pays for the title agent’s services, including administrative fees such as notary charges and bank wire fees the title agent incurs to transmit funds to the parties involved in the sale.
#4 Survey Fees
You may also need to pay a fee to the survey company that verifies the property lines of the property. This land survey helps to resolve and avoid boundary disputes with your neighbors and gives you a better idea of how much land you’ll own. If a survey’s land measurement doesn’t agree with what the seller advertises, you can try to negotiate down the purchase price.
#5 Attorney Fees
Homebuyers sign legal documents as part of the closing process. A real estate lawyer can make buying easier by providing legal insight and answering questions. The lawyer will also spot any potential issues and advocate on your behalf during disputes.
States like Delaware and New York require an attorney to facilitate the settlement. Buyers must pay the attorney for their services. Buyers can call various attorneys to find one with the most competitive rates.
#6 Recording Fees
Every county must maintain updated documents pertaining to real estate transactions and property records. Buyers will pay the government recording fee to update their local county’s records.
#7 Property Taxes
Before closing a real estate transaction, the government must receive all outstanding property tax payments. Buyers or sellers will pay the outstanding amount, depending on the language in the purchase agreement. In a competitive seller’s market, buyers may pay for the rest of the year‘s property taxes.
Property tax amounts will vary by location. Buyers will know how much property taxes they will have to pay when looking at a listing on RealtyHop, which denotes the monthly property taxes.
Before closing, buyers who take out a title insurance policy will know if the property has any liens against it related to unpaid property taxes. A mortgage lender may require the new homeowner to resolve the debt before acquiring the home. Buyers can communicate with sellers to resolve the payment but may become responsible for the property taxes during a short sale or foreclosure. Some lenders may establish an escrow account to collect property taxes and mortgage payments.
Learn more: How Are Expenses Prorated at Closing?
#8 Inspection Fee
Most buyers receive home inspections before closing. Mortgage lenders require inspections to protect themselves, and buyers paying all cash will also consider an inspection to ensure their purchase is in good condition. Those buying new construction homes can also acquire an inspection.
Buyers typically pay for the home inspection cost, which occurs before settlement. During the inspection, a professional will review the home to identify potential problems. Buyers who establish a home inspection contingency may be able to walk away from the purchase under severe circumstances, or they can work with the seller to resolve an issue. Sellers may then pay to remedy a situation or make the buyer responsible for the cost in a competitive market.
Under particular circumstances, buyers may need additional specialized inspections. Some mortgage lenders require their borrowers to get termite inspections to check the property’s structure, which usually cost between $50 and $300. Those buying an older home may get a sewer scope inspection to check the pipe conditions.
#9 Prorated Utility Fees
Like outstanding property taxes, sellers and buyers must settle any amounts owed to municipal utility authorities before finalizing a real estate transfer. Your title agent will contact the utility companies and request a final payment amount, which they will include on the settlement sheet. Most of the time, this amount causes little concern. However, buyers may become responsible for many unpaid utility bills for short sales or foreclosures.
#10 Transfer Taxes
Unlike yearly property taxes, parties may pay a one-time transfer tax to close the transaction. While the seller often covers this amount, in some states, the buyer also pays a portion of transfer taxes.
New York City buyers or sellers may also need to budget for the flip tax. Although not technically a tax, some condo and co-op buildings charge fees whenever the unit transfers ownership. Condo Associations or HOAs may also bill new owners for an initial capital contribution to help build up their funds to help limit annual fee increases in the future.
Learn more: Why Are HOA Fees so High in NYC?
Conclusion
Buying a home requires a significant upfront financial commitment. Preparing to pay closing costs will help buyers during the final stage of the process. Some buyers save for their down payment and closing costs simultaneously to ensure they have enough funds once they find their desired property. First-time buyers may also apply for programs that cover their closing costs.
