Buying a home is a significant milestone, but it’s important to be aware of the additional expenses that come with it, namely closing costs. These are the various fees and charges that come into play at the end of your home-buying journey. This guide provides a breakdown of these costs, who pays them, and tips on managing them effectively.
What Are Closing Costs?
Closing costs are the assorted fees and expenses you pay to finalize a real estate transaction. They are above and beyond the property’s price, typically ranging from 2% to 5% of the loan amount. These costs include services, taxes, and insurance necessary for transferring property ownership.
Who Covers the Costs?
Both buyers and sellers have their own set of costs. Buyers’ costs can include loan origination fees, and appraisal fees, while sellers often cover the real estate agents’ commission, title insurance, repairs, and some transfer fees. These will be paid during the closing process, which is the final step of the home-buying process.
Closing Costs You Should Know About
- Application Fee: This fee covers the lender’s costs to process your loan application, typically ranging from $250 to $500.
- Appraisal Fee: Costs about $300 to $600 for a professional appraisal to estimate the home’s market value.
- Attorney Fee: Varies greatly depending on the state and the attorney’s rates. It’s generally around $500 to $1,000.
- Closing Fee: Usually around $500 to $1,000, paid to the escrow or settlement agent.
- Courier Fee: Can be up to $100, for transporting documents.
- Credit Report Fee: Around $25 to $50 to obtain your credit history.
- Escrow Fees: About 1% to 2% of the home’s purchase price, paid to the escrow company.
- Insurance: Homeowner’s insurance varies based on property value and location, while PMI can be 0.5% to 1% of the loan amount annually.
- Property Taxes: Prorated based on the purchase price of the home and the time of purchase.
- Title Fee: Includes title search and insurance fees, typically around $700 to $1,200.
- Underwriting Fee: Approximately $400 to $900, which covers the lender’s evaluation of your loan application.
- Recording Fee: Paid to the local government for recording the property’s new deed in public records, typically around $25 to $250.
Do Sellers Have to Pay Any Costs?
Sellers typically pay the real estate agent’s commission, around 5% to 6% of the sale price. Additionally, in states like California, which are title insurance states, sellers cover the cost of the title insurance policy for the buyer’s benefit. They also share escrow fees and may contribute to some of the buyer’s closing costs in a buyer’s market.
Estimating Closing Costs
By law, your lender will provide a Loan Estimate form after you apply for a mortgage, detailing your projected costs. These costs depend on factors like the home price, loan amount, and the property’s location.
Reducing Costs
To reduce these costs:
- Shop around for lenders to compare fees.
- Negotiate with the seller to contribute towards the costs during the closing process.
- Ask your lender about no-closing-cost mortgage options.
Can You Negotiate Closing Costs?
Yes, you can negotiate lender-specific fees and sometimes third-party fees. For example, if you’re in a rush to close, you’ll have to pay an expedited fee for the appraiser. But if you don’t need a fast closing process, your appraisal fee will be lower. Comparing offers from different lenders can give you leverage to negotiate.
The Closing Process
During the closing process, expect to review and sign numerous documents related to the mortgage and property transfer, and pay your costs. This is the final step before you become the homeowner.
How Long Does It Take to Close on a House?
On average, the closing process takes about 30 to 45 days after the loan application is approved. Some lenders may offer a 14–day closing to make your offer more competitive. Check with your lender and seek pre-approval prior to searching for a home or placing an offer on a home.
Budgeting for Unexpected Costs
Have a contingency fund, about 1% to 2% of the home’s purchase price, to cover unexpected expenses during the closing process. While you should get an estimate from your lender, having some extra cash on hand can help make the closing process smoother.
Could a Real Estate Lawyer Help You Save on Costs?
When you buy a home, you’ll sign a mountain of paperwork. The fine print is intense, and although most people have good intentions, it can be confusing. A real estate lawyer can help you understand what you’re signing and potentially save on closing costs by negotiating with the lender and reviewing the fees.
A lawyer may also be able to highlight potential problems with the purchase transaction that are not outwardly apparent to the buyer, but may save heartache after the deal closes and it is too late to address them.
In California, where buying a home is a major expense, The Mellor Law Firm can help you navigate the closing process and ensure that all your rights are protected. Contact us today for a consultation.