Closing costs for a real estate transaction can vary. The type of loan, property taxes, lender fees, and more. For the buyer side of the transaction, let’s check out exactly what some of the closing costs are and how much they may be.
What are the different charges that make up closing cost.
1. Loan-Related Costs
- Origination Fee: A fee charged by the lender for processing the loan, often calculated as a percentage of the loan amount.
- Discount Points: Optional upfront payments to reduce the interest rate on the loan.
- Credit Report Fee: Charged by the lender to obtain the buyer’s credit report.
- Underwriting Fee: Covers the cost of evaluating the buyer’s loan application.
2. Property-Related Costs
- Appraisal Fee: A fee for a professional appraiser to determine the market value of the property.
- Inspection Fees: Costs for inspections, such as a home inspection, pest inspection, Sewer inspection, or radon testing.
- Survey Fee: A fee for verifying property boundaries (not always required).
3. Taxes and Government Fees
- Property Taxes: Often prorated, buyers may pay their share of property taxes from the closing date to the end of the tax period.
- Transfer Taxes: A tax on the transfer of the property title, sometimes shared with the seller.
- Recording Fees: Fees for recording the deed and mortgage with the local government.
4. Prepaid Costs
- Homeowners Insurance: Payment for the first year of coverage.
- Mortgage Insurance Premium (if applicable): Required if the buyer puts down less than 20% or for certain loan types (e.g., FHA loans).
- Escrow Account Funds: Lenders may require an initial deposit for escrow accounts to cover future property taxes and insurance.
5. Title and Legal Fees
- Title Search Fee: Covers the cost of researching the property title to ensure it is free of liens or disputes.
- Title Insurance: Protects the buyer and lender from future title disputes.
- Attorney Fees: If an attorney is involved in the transaction, their fees are included.
6. Other Costs
- Real Estate Agent Fees: Typically paid by the seller, but some agreements might include buyer-related agent fees.
- HOA Fees: If the property is part of a homeowner’s association, the buyer might need to pay prorated dues.
How Much Are Closing Costs?
Closing costs for buyers typically range from 2% to 5% of the purchase price of the property. For example, on a $300,000 home, closing costs might range from $6,000 to $15,000. It needs to be noted that is the buyer is paying cash for the property, this will greatly reduce the amount of closing costs.
Negotiating and Reducing Closing Costs
- Seller Concessions: Buyers can negotiate for the seller to cover part of the closing costs.
- Loan Programs: Some loan programs, such as FHA or VA loans, may offer reduced closing costs.
- Shopping Around: Comparing lenders and service providers can help lower fees.
Understanding the breakdown of closing costs ensures buyers are prepared and can avoid surprises at the closing table.
Real estate closing costs for buyers typically range from 2% to 5% of the home’s purchase price. However, the exact amount depends on several factors, including the property’s location, the type of loan, and the specifics of the transaction. Here’s a breakdown of what you might expect based on different purchase prices:
Factors That Influence Closing Costs:
- Loan Type: Government-backed loans like VA or FHA may have specific costs or limits.
- State/Local Taxes: Some states have higher property taxes, transfer taxes, or recording fees.
- Service Providers: Costs for appraisals, inspections, and title services can vary.
- Seller Concessions: Buyers can negotiate for the sellers to cover a portion or all of the closing costs. Many times the lender will require for this to be negotiated in order for the buyer to be able to purchase.
How to Prepare:
- Get a Loan Estimate: Your lender is required to provide a breakdown of estimated closing costs within three business days of receiving your application.
- Budget for Escrow Prepayments: If your loan requires an escrow account, you’ll need to prepay property taxes and insurance premiums.
It’s wise to consult with your lender and real estate agent early in the process to understand specific closing costs for your situation.