Having secured their mortgage, made the down payment and put away enough savings in reserve for several mortgage payments, many homebuyers think they have a good handle on their financial involvement in the buying process and mistakenly arrive at closing unprepared for the additional major and minor fees about to come their way, which is a rather routine part of the home buying process. As a rule of thumb, however, homebuyers can expect to pay closing costs equivalent to 3-5% of their mortgage loan amount. But what exactly do closing costs constitute? Read on to find out.
Before a buyer even makes an offer on a home, they need to discuss with their real estate agent who will be responsible for paying the closing costs. Many buyers who are trying to finance a down payment might make an offer that’s slightly higher on the home and ask, in exchange, that the seller pay some or all of the closing costs. Or to expedite a deal, sellers may offer to pay some of the closing costs, or list their home at a slightly higher price based upon the assumption they’ll be helping a buyer with closing costs.
Next, homebuyers need to carefully review the Good Faith Estimate the mortgage lender will provide within three days of their loan application. This will detail the specific fees associated with their loan. Keep in mind this is an estimate, however, and some costs cited could change. Costs that can not increase include loan origination fees, which refer to the initiation of the loan application process, and transfer taxes, which is a tax on the passing of a property’s title from one person to another. Costs that can increase by no more than 10 percent include any service required by a lender, title-related services and government recording charges, which is when the government notes in the public record that a change of ownership has taken place.
A HUD-1 statement also will be present during the close of a real estate transaction. It is a standard form both the buyer and seller must sign that is published by the Department of Housing and Urban Development and used to itemize closing costs.
Closing cost fees can be broken down into three categories:
Lender Fees
These are the fees mortgage lenders charge to process the buyer’s home loan. These fees include items such as appraisal and underwriting, which is the process the lender uses to determine a borrower’s ability to manage debts and make payments on a loan. Closing costs also include processing and administrative fees.
Prepaid Items
These are items related to the mortgage the lender will require the buyer to pay in advance at the closing. These items consist of interest prorated from the day the buyer closes until the end of the month and property tax escrows, which is a special savings account that will hold property tax deposits.
Title and Government Fees
The title company, which is chosen by the seller of the home, charges the buyer to coordinate the closing and to provide title insurance. The title company is ensuring that the buyer will have a good, clean, marketable title to the home or condo. Government recording fees and attorney fees are also included in this category.
