Buyers and sellers incur closing costs when they enter a successful real estate transaction. These expenses are beyond the agreed-upon price of the property and may include the following:
- Loan origination fees
- Appraisal fees
- Discount points
- Title insurance
- Title searches
- Credit report charges
- Deed recording fees
The buyer also incurs prepaid costs that include homeowners’ insurance and property taxes. The lender must follow state laws regarding stating these expenses in a loan estimate form within three days upon receipt of a home loan application. Moreover, equity gifts also incur closing costs. Let’s talk about closing costs further, so you better understand them and the impact to your investments.
Who Pays the Closing Costs?
The transfer of the property title from the seller to the buyer incurs closing costs. The amount depends on the location and value of the asset. Generally, homebuyers pay from 2% to 5% of the price, but the seller or the buyer may pay the amount.
2020 Average Closing Costs
Some loan products and U.S. states require specific inspections that the buyer must pay to their chosen home inspector. Transfer and property taxes, insurance, and other fees are part of closing costs. According to ClosingCorp, the average closing costs for a single-family property in the U.S. for 2020 are as follows:
- Including taxes: $6,087
- Excluding taxes: $3,470
Examples of Closing Costs
Lenders must itemize all closing costs on the closing disclosure and loan estimate. Here are some of the standard fees that your clients can expect:
The lender charges this fee to process the mortgage application. It’s best to ask them for the details before applying for one.
A real estate attorney prepares and reviews documents and contracts of the home purchase, and they charge this fee for their services. However, not all U.S. states require them for a real estate transaction.
Its other name is escrow fee, and the buyer pays it to the entity that facilitates the closing. It may be an escrow company, a title company, or a lawyer, depending on the U.S. state.
A courier fee is an expense that expedites the transport of paper documents for signing by the concerned parties. Keep in mind that digital closings don’t require it.
Credit Report Fee
The lender charges a fee that ranges from $15 to $30 to pull the buyer’s credit report from the three reporting bureaus. However, some may not impose it because the credit report companies offer them a discount.
Lenders may require buyers to deposit up to two months’ worth of mortgage insurance and property tax payments at closing.
FHA Mortgage Insurance Premium
Buyers opting for FHA loans need to pay an up-front mortgage insurance premium. It’s equivalent to 1.75% of the base loan amount and payable at closing. Moreover, they must pay the yearly mortgage insurance premium divided into 12 months. The percentage can range between 0.45% and 1.05%, depending on the loan base amount and term.
Transfer Fee for Homeowners’ Association
Buying a property, townhouse, or condominium in a planned development requires joining the homeowners’ association. The transfer fee is for the cost of changing ownership. The seller or buyer may pay it, and the former must provide the documents reflecting the HOA dues plus a copy of the HOA minutes, notices, and financial statements.
Generally, lenders ask for prepayment of the insurance premium for the first year at closing.
Lender’s Title Insurance
The title company levies this fee for the lender’s protection if there’s a lien or an ownership dispute arises.
Lead-Based Paint Inspection
A certified inspector charges this fee for checking for lead-based, hazardous paint in the real estate property.
Flood Determination and Monitoring Fee
A certified flood inspector charges this fee to determine if the real estate is flood-prone or not. If it is, the buyer must pay flood insurance, aside from the homeowner’s insurance. The fee also covers monitoring of the changes in flood status of the property.
Discount points are upfront but optional payments to the lender to reduce the interest on the loan. A point is equivalent to 1% of the loan amount, but if the interest rate is low, it might not save the buyer much money.
Owner’s Title Insurance
This insurance policy protects the buyer in case someone claims ownership of the property. Legal experts recommend it, but it’s optional.
This fee covers the administrative costs incurred by the lender. It’s often equal to 1% of the loan amount. On the other hand, some lenders charge a higher interest rate instead of charging origination fees.
A pest inspection is the cost of inspecting the property for dry rot, termites, or other damages due to pests. Some government-insured loans require it.
Prepaid Daily Interest Charges
This fee covers the mortgage interest that will accrue from the closing date to the first mortgage payment date.
Private Mortgage Insurance
The lender may require this insurance type if the down payment is less than 20%. The lender may require the first month’s payment at closing.
Property Appraisal Fee
This required fee is for assessing the fair market value of the property by a professional property appraiser to establish the loan-to-value ratio.
The buyer must pay the property taxes at closing, and they are often due within two months after the purchase.
Rate Lock Fee
The lender charges this fee to guarantee that the interest rate will remain the same for a limited time, often from the day the buyer receives a preapproval up to closing.
Real Estate Commission
Generally, the seller pays the commission fee, equivalent to 5% to 6% of the property’s purchase price. The buyer’s and seller’s agents often split the amount evenly.
The local recording office charges this fee to keep public land records.
The buyer pays a surveying company to determine shared fences and property lines.
Tax Status Research and Tax Monitoring Fees
A third party monitors property tax payments and notifies the lender of any problems, such as failed or late payments.
Title Search Fee
The title company charges a fee to analyze public property records for discrepancies. It checks deed records to ensure that the real estate doesn’t have any unresolved liens or ownership disputes.
This tax pertains to the transfer of the property title from the seller to the buyer.
The lender levies this fee for underwriting the loan. Underwriting is a verification process for financial information, employment, income, and credit necessary for the loan approval.
VA Funding Fee
A VA borrower needs to pay this fee, equal to a loan percentage offsetting the costs to U.S. taxpayers. It depends on the loan and the military service classification of the creditor. Some members of the military may be exempt from paying this.
A real estate professional must have ample knowledge regarding closing costs to make sure his clients are well-prepared. An excellent broker can help explain what each expense means so his clients don’t feel surprised that they must pay them at closing. Each amount varies, depending on the location and state of the property.
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