Real estate closing costs are the fees associated with the purchase of a home. Paying these costs is the final step between the buyer and seller “closing” the contract based on the purchase agreement and completes the exchange of ownership of the property. These expenditures include a number of predetermined fees such as appraisals, property tax escrow and others. These fees are established by the Federal Housing Administration (FHA) the largest insurer of residential mortgages in the world. Fees not allowed by the FHA are generally charged to the seller of the home.
What are the costs associated with closing a home purchase?
They are specific costs associated with the sale of a home as determined by the local FHA office nearest to you and may depend on your specific situation, such as where you live, the property you buy and the lender you choose.
Typical closing cost charges include:
Origination Fee – a fee the lender charges for offering the loan to you. This can often be negotiated out of the fee structure but can be up to 1% of the fees.
Discount Points – If you negotiate paying a fee to lower interest rates, it may be listed as a discount point fee.
Credit Report Fee/Loan Application Fee – A lender fee for the purchase of one or more credit reports and the fee associated with the processing of your loan. These fees can often be waived by your lender.
Private Mortgage Insurance – Required of all borrowers who pay less than 20% down on the price of the home. This insurance only protects the bank that has lent you the money to purchase the house in case of non-payment of said loan or repossession and resale of the home.
Initial Interest – Initial interest is the interest owing on the mortgage from the closing date to the first payment on the mortgage. For example, if you close on 15 January and the first payment is 1 March, interest will be calculated and payable on this period.
Title Insurance – Title insurance is paid by you to protect either your lender, or yourself against claims of ownership of the property. The Title Company will generally run a check on the title before issuing you a policy.
Property Taxes Escrow – The lender will generally collect property taxes in escrow for city, county, and local municipality, normally for the first 2 months.
Appraisal – Most lenders require a home appraisal to ensure the value of the home is within range of the price of the home to protect themselves should they have to repossess the home.
Survey - Generally, a survey is not required. But if property boundaries or right of ways are not clear the buyer or lender may require a demarcated property line to determine the proper boundaries of the property.
Homeowners Insurance – Almost all lenders require the home buyer to carry homeowners insurance to protect the home in case of fire, vandalism, theft, hurricane and more.
Government Recording Fees/Taxes – Most municipal or state governments require a fee to record the sale of the property. Some also charge taxes on the sale of a home.
Buyer Attorney – A fee associated with the cost of using an attorney to close the loan. Many homeowners are choosing not to use real estate attorneys but this is a personal choice.
Depending on your location, local government, lender or property chosen there may be other fees. However, checking these fees against your local FHA chapter’s allowable fees is a wise investment of time to protect yourself against unscrupulous lenders.
Typically closing costs can run on average between 2-5% on top of the purchase price of the home. The median home price in the U.S. is $200,000. Closing costs would add another $4,000 to $10,000 onto the total price of the home, not including down payment.
The savvy buyer does their best to negotiate as much of the closing costs to be paid by the seller as possible. Many homeowners find that under the right circumstances, a seller may be willing to pay all closing costs, but at a minimum, most will pay at least half of the fees. Savvy buyers also shop around to ensure their lender of choice is offering them the lowest closing fees possible.
Buyer’s often have the option of rolling closing costs into the mortgage without having to pay them upfront. Not all lenders allow this option and even if your lender does, the total mortgage must still be under the Loan-to-Value Ratio (LTV). If the lender allows an 80% mortgage value, based on your credit score, on a $190,000 home, the total mortgage is only allowed to be $152,000 including all fees.
Since there is a large range in closing fee costs from state to state, lender to lender and even between the credit scores of individuals, ensure your lender is offering you the best possible price by comparison shopping and protecting yourself against higher than necessary fees.