What Are Closing Costs? What Do They Consist of?

What are closing costs?

Closing costs are fees associated with your home purchase that are paid at the closing of a real estate transaction. Closing is the point in time when the title of the property is transferred from the seller to the buyer. Closing costs are incurred by either the buyer or seller.

Here is a list of fees that may be included in closing.  The list is inclusive of fees you may see, but it’s not likely that your loan will include all of the fees listed here:

Application Fee:This fee covers the cost for the lender to process your application

Appraisal: This is paid to the appraisal company to confirm the fair market value of the home.

Attorney Fee: This pays for an attorney to review the closing documents on behalf of the buyer or the lender. 

VA Funding Fee: If you have a VA loan, you may be required to pay a VA funding fee at closing (or you can roll this fee into the cost of the loan if you prefer). This is a percentage of the loan amount that the VA assesses to fund the VA home loan program, however some borrowers are exempt from this fee. The percentage depends on your type of service and the amount of your down payment. Here is a breakdown of the cost of the VA funding fee and a complete list of allowed fees for VA loans.

Closing Fee or Escrow Fee: This is paid to the title company, escrow company or attorney for conducting the closing. The title company or escrow oversees the closing as an independent party in your home purchase. Some states require a real estate attorney be present at every closing.

Credit Report: A Tri-merge credit report is pulled to get your credit history and score. Your credit score plays a big role in determining the interest rate you’ll get on your loan.

Escrow Deposit for Property Taxes & Mortgage Insurance: Often you are asked to put down two months of property tax and mortgage insurance payments at closing.

FHA Up-Front Mortgage Insurance Premium (UPMIP): If you have an FHA loan, you’ll be required to pay the UPMIP of 1.75% of the base loan amount. You are also able to roll this into the cost of the loan if you prefer.

Flood Determination and/or Life of Loan Coverage: This is paid to a third party to determine if the property is located in a flood zone. If the property is found to be located within a flood zone, you will need to buy flood insurance. The insurance, of course, is paid separately.

Home Inspection: You will likely get your own home inspection to verify the condition of a property and to check for home repairs that may be needed before closing.

Homeowners Association Transfer Fees:
The seller is responsible for covering the transfer fees associated with the Homeowners Association (HOA). This fee ensures the buyer receives important documentation that confirms the current status of the HOA dues, including a statement verifying that all dues are up to date. The transfer package typically includes a breakdown of the dues, a copy of the HOA's financial statements, and recent meeting minutes and notices. The package will also include the association’s governing documents, such as the bylaws, rules and regulations, and Covenants, Conditions, and Restrictions (CC&Rs). Reviewing these materials will give you insight into the HOA’s operational policies and any restrictions that may affect your property use. 

Homeowners’ Insurance: This covers possible damages to your home. Your first year’s insurance is often paid at closing.

Lender’s Policy Title Insurance: This is insurance to assure the lender that you own the home and the lender’s mortgage is a valid lien, and it protects the lender if there is a problem with the title. Similar to the title search, but always a separate line item.

Lead-Based Paint Inspection:
This fee covers the cost of assessing potential lead-based paint hazards in homes built before 1978. The inspection evaluates areas where lead-based paint may pose a risk, particularly in older properties, to ensure the safety of residents, especially young children and pregnant women who are most vulnerable to lead exposure

Loan Discount Points:“Points” are prepaid interest. One point is one percent of your loan amount. This is a lump sum payment that lowers your monthly payment for the life of your loan.

Owner’s Policy Title Insurance: This is an insurance policy that protects you in the event someone challenges your ownership of the home

Origination Fee: This covers the lender’s administrative costs. It’s usually about 1 percent of the total loan but you can sometimes find mortgages with no origination fee.

Pest Inspection: This fee covers the cost to inspect for termites or dry rot, which is required in some states and required for government loans. 

Private Mortgage Insurance (PMI): If you’re making a down payment that’s less than 20% of the home’s purchase price, chances are you’ll be required to pay PMI. If so, you may need to pay the first month’s PMI payment at closing.

Property Tax: Typically, lenders will want any taxes due within 60 days of purchase by the loan servicer to be paid at closing.

Recording Fees: A fee charged by your local recording office, usually city or county, for the recording of public land records.

Survey Fee: This fee goes to a survey company to verify all property lines and things like shared fences on the property.  This is not required in all states.

Title Commitment/ Title Search: This fee is paid to the title company for doing a thorough search of the property’s records. The title company researches the deed to your new home, ensuring that no one else has a claim to the property.

Transfer Taxes: This is the tax paid when the title passes from seller to buyer.

Underwriting Fee: This also goes to your lender, covering the cost of researching whether or not to approve you for the loan.

So how much are closing costs now?

Your lender will give you a Loan Estimate for your loan, which will include what the closing costs on your home will be, within three business days of receiving your completed loan application. But these are just an estimate, and many of the fees listed can change. 

Typically, home buyers will pay between about 2 to 5 percent of the purchase price of their home in closing fees. So if your home purchase is $300,000 you could expect to pay between $6,000 - $15,000 in closing costs. On average, buyers pay roughly $3,700 in closing fees, according to a recent survey.

How do you avoid paying closing costs as a buyer?

A professional negotiator like myself can get your the entirety of your closing costs covered or mostly covered. We have cases where my buyers do not need to pay for the closing costs at all!!!!

You can also avoid upfront fees on your loan by getting a no-closing cost mortgage, in which you don’t pay any of the closing costs when you close on the mortgage.

Depending on which route benefits you the most, we would have to have a consultation!