Closing costs are simply expenses paid at the end of a real estate purchase; the term encompasses just about every little fee and payment made by both the buyer and the seller. Some are negotiable or optional, while others are fixed and mandatory, but the total amount that is paid in closing costs will vary significantly. In most cases, closing costs for the buyer will be around 2% to 5% of the total purchase price. This means you’ll pay roughly $2,000 to $5,000 in closing costs for every $100,000 worth of home value.
Closing Costs Must Be Highlighted in the “Good Faith Estimate”
While the final tally can vary, when you are pre-approved for a loan you should receive a “good faith estimate” from the lender. This document, also known as a “GFE,” will include an estimate of the closing costs. Three days before you complete the final closing, you should be issued a closing disclosure, which will have the final numbers on your loan and the closing costs.
Typical Closing Costs for Buyers
If you are purchasing a home, these are some of the closing costs you can expect to pay…
- Appraisal: The appraisal is an important part of the real estate process, and the buyer will have to pay for a professional assessment of the value of the home. The appraised value will be essential for determining loan-to-value, an important factor for loan approval.
- Attorney Fee: The legal regulations impacting real estate can be fairly complex, so you will have to have an attorney assist with many different aspects. The attorney fee helps pay for the cost of paperwork, which will be completed by a trained legal professional.
- Credit Reports: As you likely know, credit scores are important for helping a lender assess a borrower’s risk level. To pull reports, there will be a small fee, which will give you access to information from the major credit companies. This information will cost money, so borrowers will pay for the credit report as part of their closing costs.
- Escrow: Escrow is when property, usually money, is held by a third party and released when certain conditions have been met. This service comes with a cost, and the fees for escrow usually cover several months of insurance, as well as money for tax payments.
- Home Inspection: As the buyer, you will have to pay for the costs of home inspections. Most lenders will require inspections to verify that the home they are lending money on does not have any major issues and can be reasonably expected to hold its value.
- Loan Origination: Creating and processing the loan takes time, and lenders need to be compensated for their efforts. This is a small fee that essentially makes processing the loan application possible.
- Points: This is technically an optional closing cost, as not every loan will include points. Points are an additional cost you pay upfront, and in return you get a lowered interest rate on your mortgage loan.
- Recording Fee: The purchase will need to be documented with the appropriate county or city where the property is located. The buyer will pay these fees to cover the costs of documentation.
- Title Search: This fee can actually be charged to the buyer or the seller, depending on how the property is structured. It essentially covers the work that goes into verifying the title of the home.
Can You Reduce Buyer’s Closing Costs?
While closing costs are an inescapable part of the real estate industry, there are ways to reduce the amount you pay. You can start by negotiating down closing costs or bargaining with the seller to have them cover some or all of your closing costs. This method, however, is only effective in a buyer’s market with lots of inventory and few buyers; if it’s the other way around, you’ll likely be paying the closing costs.
It may also be possible to have the closing costs rolled into your mortgage. This can make the upfront costs of buying a home more affordable, but it’s possible that the lender will increase interest rates if costs are rolled.
If you are a low-income buyer, you may qualify for government assistance to cover the closing costs, especially if you are using a government-supported loan, such as an FHA or USDA loan.
You may also be able to reduce the costs by shopping around for certain services. Title services, for example, are offered by various companies. By searching for the best deal, you may be able to reduce your costs.