Buyer Closing Costs 101

Homebuyers will be responsible for paying many fees and other charges at closing. You may already have heard of some of them, and if you aren’t a first-time homebuyer, then you’re likely well aware of the many fees associated with closing costs. When you decide to buy a home and enter into a contract with a lender for a mortgage, you’ll receive a closing disclosure statement detailing many of the closing costs. Here is a comprehensive breakdown of many closing costs and closing-related terms to better understand what you will be paying and why.

It’s also important to note that many fees usually paid by the buyer can sometimes be paid by the seller at closing instead. This usually happens when the seller offers to cover some closing costs to incentivize prospective buyers seeking to purchase the home. In a seller’s market, this usually won’t happen, but it is something to consider when calculating your actual closing costs.

Closing Costs, Fees, and Terms to Be Aware of When Buying a Home

First Payment Due: This refers to the date your first mortgage payment will be due. Your first payment will typically be due on the 1st of the month within 60 days of closing. Subsequent payments will occur every 1st of the month after that. Depending on the date that you close, you may be able to skip a whole month before your first payment is due.

Estimated Closing Date: Although you will receive a closing date when you initially sign your purchase agreement, this date could change. As of that point in time, it is only an estimated closing date. The closing attorney will set the actual closing date. There are also many reasons a closing date might change — this is normal in real estate transactions.

Sale Price: Although a home may be listed at a specific price, the sale price refers to the price the buyer will pay once negotiations are complete.

Down Payment: A down payment on the property is usually required in a real estate transaction. The down payment requirements can be as little as 3% or as much as 20% of the home’s purchase price, depending on the type of mortgage the buyer is seeking.

Loan Amount: The loan amount is the money a lender provides toward purchasing the house. Lenders typically do not give you 100% of the home’s sale price. For example, if you buy a home for $250,000 but pay a $50,000 down payment, your loan amount will only be $200,000.

Loan Term: The loan term refers to the length of time in which you will pay back the loan. Common loan terms are 15, 20, and 30 years. These loan terms are based on scheduled payments. Many loans allow buyers to pay off the loan earlier than the term if they desire.

Interest Rate: When you pay back a loan, you pay back the loan amount plus interest. Consider the interest and the cost of borrowing the money. Interest is usually applied to each regularly scheduled payment. The interest rate can vary according to current market conditions and whether you choose to “pay point” to lower your interest rate. Your credit score can also affect the interest rate you receive. It is also important to note that you are not locked into a specific interest rate until you receive a closing disclosure from a lender. Additionally, unless you have an adjustable-rate loan, your interest rate will not change for the course of the loan.

V.A. Status: You are eligible for a V.A. loan offered through a U.S. Department of Veterans Affairs program if you qualify for V.A. status. To apply for V.A. status, you must be either an active or veteran service personnel. Present the V.A. Office with an official copy of their D.D. Form 214/215, or NGB 22/22A.

V.A. Loan Use: There is no limit on how many times you can use a V.A. loan, so long as you are still entitled under V.A. status.

Finance VA Funding Fee: V.A. funding fees are typically paid when your close your loan. You can pay the full fee all at once or choose to finance it by paying it off over time.

V.A. Funding Fee: The VA funding fee is a payment made to the Department of Veterans Affairs. The amount you pay for this one-time fee depends on how much you put as a down payment for the home you wish to purchase. It also depends on whether you are a first-time homebuyer or not.

Annual Property Tax: All homeowners must pay property tax, which is calculated annually. The amount will vary depending on several factors; where the home is located and the tax appraised value of the home. Although many mortgages require you to pay property tax as a part of each monthly premium, these monthly tax payments are typically held in escrow until a lump sum payment is due annually.

Property Taxes Paid Through: Most homebuyers pay property taxes monthly as part of their mortgage premium. The lender then holds these tax payments in escrow until the property tax is due, either annually or semiannually. In some states, you will be responsible for paying property taxes directly rather than through your mortgage lender.

Annual Homeowner’s Insurance: Purchasing homeowners’ insurance is a requirement for getting a mortgage. Homeowner’s insurance is paid yearly, typically from an escrow account held by the lender, but you will pay it monthly as part of your mortgage premium.

Monthly Association Dues: If you live in a development or part of a community with a Homeowner’s Association (HOA), you will likely need to pay monthly HOA fees. These are usually paid directly to the HOA. The fees can vary greatly depending on the community and what the HOA provides regarding maintenance and other community amenities. Sometimes HOAs may also issue an additional fee known as an assessment if other projects within the community need to be undertaken, such as the building of a playground.

Annual Flood Insurance: In addition to homeowner’s insurance, you may also need to pay annual flood insurance. The amount can vary based on several factors; your actual flood risk, your home’s location, the design of your home, the deductible you choose, and the type of coverage you purchase.

Months Of Escrow: As part of your mortgage premium, the payment includes homeowner’s insurance and property taxes. These payments are put into an escrow account held by the lender and then paid annually when the bill for either is due. At closing, you will be required to pay a certain number of months’ worth upfront to establish an escrow account. Usually, your lender will require a minimum of 2 months of escrow payments to be held in reserve.

Earnest Deposit: Sellers usually require an earnest deposit from buyers, which is essentially a payment of good faith that eventually goes toward closing costs. It tells the buyer that you are serious about purchasing the home, and they then take it off the market once the contract between the buyer and the seller is signed. However, if you decide not to purchase the home, in most cases, the seller gets to keep the earnest money deposit. In a seller’s market, offering a large earnest money deposit is wise to entice the seller to accept your offer.

Commitment Fee: Lenders will charge a commitment fee when extending a line of credit to a borrower. The fee guarantees that the bank will keep the funds available for the buyer.

Points Paid By Seller: All lenders offer loans at a base interest rate based on various market conditions and borrower’s credit scores. However, buyers can often pay for points, which is a way of saying they are paying extra in exchange for a lower interest rate of the term of the loan. Sometimes these points will be paid by the seller instead as an incentive to the buyer.

Closing Costs Paid By Seller: A home seller is usually responsible for paying the commission on the home to the brokers handling the transaction. Sellers may pay for other closing costs often paid by the buyer as an incentive to the buyer.

Principal And Interest: The principal refers to the amount of money you borrowed from a lender. Interest is the amount you are paying back based on the interest rate of your mortgage. Your monthly premiums will include a breakdown of the part of the principal and interest you are paying back with each payment.

Prepaid Interest: When closing, there is often some part of the month left over in which payments technically still need to be collected for the mortgage from either the buyer or seller. Prepaid interest is the cost to the buyer of the interest accrued for the remainder of that month that the closing takes place, even though the first actual mortgage payment won’t be due for another month.

Mortgage Insurance (PMI): Private mortgage insurance, also called PMI, is usually required when a buyer does not pay a 20% down payment on a home. The PMI protects the lender if you default on your loan. There is typically an upfront fee at closing for PMI, and monthly payments are added to your monthly mortgage premiums.

Points Paid By Buyer: When you apply for a mortgage, you are given an interest rate based on current market conditions and your credit score. However, you can pay a bit extra at closing, called points, to reduce your interest rate to something more favorable.

Application Fee: You will need to pay a fee for filing an application with a mortgage broker. The fees can vary significantly from broker to broker.

Origination Fee: These are an amount you must pay based on a percentage of the loan amount charged to cover the cost of the service you receive from the lender up until the date of closing.

Appraisal Fee: During the closing process, an appraisal of the home will often need to be performed to determine the home’s market value. The lender will usually require an appraisal, but it is still recommended to have one performed even if they don’t.

Credit Report: There may be a fee associated with ordering your credit report, which is required to determine if you are eligible to receive a loan.

Lender’s Inspection Fee: Lenders may require their own licensed inspector to inspect the property. There will be a fee for this inspection, including pest inspections.

Lender’s Attorney Fee: Lenders may have their own real estate attorney handling the preparation and review of the closing documents. This attorney will have their own fee.

Assumption Fee: Sometimes, the property you intend to buy has not been completely paid off to the bank. The assumption fee is the charge associated with assuming the mortgage on the property.

Abstract Or Title Search: This is a fee charged by the title company to perform a search on the title of the home you intend to purchase. The title search will discover if there are any problems with the title, such as liens or judgments.

Title Insurance: Title insurance is often required by a lender and is designed to safeguard both the buyer and the lender from issues with the title that might arise in the future.

Title Examination: This is a fee charged by the closing attorney. The closing attorney will examine the title to see if there are any issues, such as liens or judgments, breaks in the chain, or unsatisfied mortgages. The examination also reveals a history of ownership and any past deeds, wills, or trusts associated with the title. The purpose is to ensure that the title is not legally tied to another individual or estate.

Document Preparation: Your lender may require a fee to prepare all the necessary paperwork to provide you with a loan estimate. The fee covers the administrative costs as part of this process.

Notary Fees: Many documents you sign will also require the presence of a licensed notary to witness and sign the papers. This fee covers the costs of having the notary present and swear that you did sign the documents.

Attorney’s Fees: In some states, only one closing attorney is required to handle the closing for both the buyer and the seller. In other states, the buyer and seller must have their closing attorney present. In either case, the buyer will pay attorney fees for preparing and recording the legal documents. Sometimes the payment of attorney fees can be negotiated between the buyer and seller.

Recording Fees: This fee covers recording certain documents with the official county records. In a real estate transaction, this typically serves to create a traceable chain of title. However, it will not necessarily help establish the property owner.

City/County Tax Or Stamps: There may be cause to purchase city tax stamps as part of the closing process. These are stamps (usually an adhesive label) affixed to a document to indicate that certain taxes or fees must be collected.

State Tax Or Stamps: There may be cause to purchase state tax stamps as part of the closing process. These are stamps (usually an adhesive label) affixed to a document to indicate that certain taxes or fees must be collected.

Other Government Fees: Depending on where the home is located, local governments may charge additional fees related to the closing.

Survey: Some lenders may require you to have a survey performed before the closing to confirm the property’s boundary lines. The survey will also detail easements and other restrictions regarding the property. Even if the lender doesn’t require a survey, getting one is still a good idea.

Pest Inspection: Sometimes, the lender may require you to get an inspection for termites or other pests that can infest a home.

Flood Determination Fee: This fee is paid to verify that the property you want to buy does not reside in a flood zone. This is a standard fee when the home is near a flood zone, and even if it is some distance away from a classified flood zone. The cost goes toward a third-party review of flood zone maps.

Settlement Or Closing Fee: This fee refers to the cost the buyer must pay to close the sale of the house. The fee is paid to the settlement agent or the person in charge of the escrow account.

Broker Fees: The real estate broker will receive a commission based on a percentage of the home’s sale price. Most of the time, the broker fees are paid by the seller. But in some cases, the buyer may contribute some or all of the broker fees.

Other Fee: Any additional fee required to be paid by the buyer.

With the above information, you can use the calculator on this page to better calculate your proceeds from the sale of your home. The calculator can provide a detailed breakdown of all associated fees and earnings.

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