When people think about getting financing for their house purchase, they tend to think primarily about how much of a mortgage loan they hope to secure and how much down payment they would need to pay.
While those two factors are crucial, there is a third factor that you can’t avoid if you are serious about buying your property; that factor is the closing costs.
What Are Closing Costs for a Homebuyer?
Closing costs are the payments you will need to make before you can officially close on a property. They are like down payments, but this is more of an upfront cost, unlike a down payment. Once you have completed your purchase, you will be making the monthly mortgage payments. But before you reach there, you have to make a down payment on your new home and pay all the fees required to close the exchange.
As a buyer, how much the closing costs will be, depends upon a wide array of things. However, within three days of accepting your loan application, a lender is legally required to provide you with the paperwork talking about your loan estimate.
Understanding Potential Issues
Among other things, this document must include an approximation of what your closing costs will come up to. Otherwise, you could go through the entire purchasing process of buying your dream home, only to get blindsided during the final step, forcing you to go back to the drawing board and build your budget plan up from scratch again. So, while the document is just an estimate, it’s usually a reliable one.
Your actual closing costs would ideally be pretty close to the estimate provided to you. A lender wouldn’t want to lose a potential client because the closing costs estimated by them turned out to be hugely different than what you would have to pay.
Furthermore, your lender should give you a closing disclosure three days from your actual closing. This document provides details such as the final amount for your loan and a break up of any closing costs involved.
However, it is always helpful to get a better sense of what fees your closing costs may entail before applying for a mortgage. Typically, the fees which make up the closing costs are as follows:
1. Lender Fees
Your lender may either charge you an origination fee or a single fee for your mortgage or break them up into individual amounts as listed below:
- Processing Fees
- Transfer Taxes
- Courier Fees
- Administrative Fees
- Credit Check Cost
- Flood Certification
- Appraisal Costs
Some lenders may also allow you to request discount points. These points help you lower your interest rate. However, you should consider this carefully as this would need to be paid as a closing cost.
2. Title Fees
Before you formally take over your new house, you want to be sure that no one will have an opportunity to challenge your ownership. For example, if the former owner has a lien and the lender proved that the house is theirs, you may face an expensive and lengthy court case to retain your purchase.
A Solution for the Problem. It is why you should pay for the title insurance while closing. The insurance company will conduct thorough research to ensure that there won’t be any such challenges to your claim to the house once you close.
When you are taking out a mortgage, you will also be required to buy a title insurance policy for the lender for the same reasons. They, too, want an assurance knowing that their client, you, will never be stripped of their collateral.
Title fees usually represent the bulk of the closing costs. So, it helps to shop around. It helps choose a different title company than the one the seller used; this provides greater scrutiny of the property, thus ensuring that the purchase happens hassle-free and stays in your name without any hiccups.
3. Third-Party Fees
Any number of third parties may become involved in your purchase. Each of them will charge you a fee for their services rendered.
Some of these fees may include:
- Mortgage Insurance
- Credit Report Fee
- Appraisal Fee
- Tax Service Fee
These fees usually tend to be fairly low, going up to $400 for your appraisal. Again, your lender’s initial estimate should list them.
4. Homeowner Fees
Finally, having the ownership of a house comes with certain financial obligations.
The most common types of these types of fees are:
- Homeowners Association Dues
- Escrow Account Fees
- Property Taxes
- Homeowners Insurance
Even though these fees are typically assessed annually, they are often charged monthly or quarterly with the money being held in escrow. Sellers often prefer making these payments ahead of time when they won’t even own their property anymore.
In such cases, they typically require that you reimburse them for those amounts upon closing. You will still get to take advantage of the benefits associated with those fees, such as services the HOA provides.
Who Pays the Closing Costs?
The answer is that both parties may have closing costs they may have to pay. The seller’s closing costs could include payments such as:
- Transfer Tax
- Prorated Property Taxes
- Attorney Fees
- Escrow Fees
- HOA Fees
- Real Estate Agent Commission
However, who ends up pays for what is officially decided during the negotiations.
For example, if the market is a buyer’s market, the seller may be willing to talk about covering some of those fees above as a way to make the purchase more lucrative for you.
Think Smart, Act Smart
Buying a home is a big decision, and the financial aspect deserves careful consideration. If you think you need more time to prepare, ask a loan officer to pre-qualify you for a loan before you start looking. FHA loans let you pay the closing costs with gift money, and your city or state may have first-time homebuyer programs available as well. Consult with professionals such as your loan officer and your real estate agent to understand the possibilities and what works best for you.
Have Questions? Ask The Grant Homes Group & Coast2Coast Realty!
The Grant Homes Group & Coast2Coast Realty is the best source of information about the local community and real estate topics. Give us a call today at (888) FLA-GULF (888-352-4853) to learn more about local areas, discuss selling a house, or tour available homes for sale.