Closing costs are fees that are charged in connection with a real estate transaction. These fees are charged to the buyer, the seller, or both. The closing costs are different from the down payment on the house. The down payment is money that a buyer puts down that reduces the principal amount of the loan. Closing costs, however, are fees that are paid to the lender, the title company, the state, the appraiser and anyone else who is working to get a new buyer into a home.
People often say that they don’t want to pay closing costs on a purchase of a home. Well, someone has to pay the costs. There are many people involved in the home buying process and everyone needs to be paid for the work they perform. Depending on where you live, the cost to close on a home will vary from approx. 2% to 5 or 6% of the purchase price. When saving for a home, remember that you will also need to consider saving for the closing costs.
What are these fees?
Lender Fees – the lender fees can be:
Origination, application, processing, underwriting, broker fees. In addition, the lender will charge third party fees that include but not limited to:
Appraisal, tax service, flood certification, credit report, condo questionnaires. Only the exact third party fees are passed along to the consumer.
Many people believe that lenders dictate what is charged at closing but this is not true. Lenders are only responsible for the fees that they actually charge. Not even the third party fees are dictated by the lender. The lender is the messenger of everyone’s fees but is only responsible for their own fees.
Title fees – fees associated with the title company are:
Closing fees, settlement fees, lender title insurance, owner’s title insurance, abstract fees, endorsements, attorney fees, overnight fees, photocopies, notary fees, lien certs, judgment reports, document review fees, etc.
Along with performing the actual closing, the title company makes sure that, prior to issuing a title insurance policy to a buyer and or lender, that the title is free and clear of any issues that may impact the title to the property. The title company will hire an abstractor who will perform a title search of the property by researching the abstract of title or title abstract. This process can be complex because the abstractor must review certifications, dates, names, and make sure the legal description is always appearing with each entry. The parties on the abstract must be checked to verify there are no bankruptcies or other debt that may cause a creditor to file a lien against the property. In other words, there are a lot of items that must be checked prior to giving a clean title. This is part of the fees that are charged at closing.
Government recording and transfers
Depending on which state you are buying your new home, you may have the privilege of paying either the state, the country or a municipality tax for transferring the real property. Some states do not have this tax but if you’re one of the lucky ones, you could pay more than 2% of the purchase price of the home as a transfer tax. The recording fees are charged by government agencies to record real estate sales or purchases.
Prepaid items and recurring costs
Other items paid at closing are interest, taxes, insurance, condo, and homeowner’s association fees. These are not considered closing costs because these fees would be paid regardless of whether or not there is a new loan. At closing, if you are going to have a mortgage, you will need to pay for a year’s worth of homeowner’s insurance upfront or at closing. If you are escrowing for property taxes and homeowner’s insurance, the lender will also require that a few months of reserves are deposited into an escrow account so that the next year when the taxes and insurance are due, there will be enough money to pay for both of them.
There are a lot of people and a lot of items that need paid on the closing of a mortgage. In many cases, the buyer can ask the seller and/or the lender for closing cost help. Depending on what type of mortgage you get, the buyer may be able to get all of the closing costs paid for by the seller, the lender or a combination of both. It never hurts to ask for the closing cost help and if you think you may need any at all, make sure your realtor puts that in your contract.
By Denise DeCarolis