Buying a house is exciting. But a lot of steps are involved, and it’s easy to get lost. One thing that many first-time homebuyers tend to overlook is the closing costs.
In fact, more than 50% of homebuyers are caught off guard by how much they have to pay in closing costs. To avoid difficulties, you should learn precisely what you’re up against well before you commence the homebuying process.
What are Closing Costs?
Closing costs are one-time fees you pay to complete a home purchase. Typically, they amount to anywhere from 3% to 6% of the total price.
To give you an idea, the average closing costs of US homebuyers in 2020 was $5,749. Of course the number will vary by state, lender, and loan size and type.
And you don’t pay closing costs to just one party. Different portions of the amount will go to lenders, insurance companies, title companies, attorneys, and local governments.
Here’s a rundown of common closing fees, along with a rough estimate (where possible) of how much they will set you back.
Loan-Related Closing Costs
- Loan application fee ($300 to $500). This is a non-refundable fee you pay to the mortgage lender just for the loan application.
- Loan origination fee (0.5% to 1.5% of loan). The lender charges this for processing and underwriting the loan. Every lender is required by law to disclose these up front, so the homebuyer doesn’t suffer any surprises on closing day.
- Courier fee ($20 to $30). This is a fee for shipping the mortgage documents. It doesn’t apply if the mortgage company distributes the documents digitally.
- Credit report fee ($10 to $100). The lender will have to run your credit report. This is a tri-merge credit report that pulls information from all three US credit agencies: Experian, Equifax, and TransUnion. Though some lenders cover the cost of doing this, others charge you for it.
- Prepaid interest. Often, lenders will require you to pay up front for any interest that accrues between your mortgage closing date and the first mortgage payment.
Property-Related Closing Costs
- Home inspection fee ($300 to $450). A home inspection assesses the condition and safety of the house and all its utilities. Though not required, a home inspection is well worth the money. It tells you whether anything’s wrong with the structure, so you have a solid basis to negotiate the price down or walk away if there are potential issues.
- Appraisal fee ($300 to $600). Lenders require you to hire a professional appraiser to determine the current value of the residence. Though it may seem redundant after a home inspection, an appraisal gives the lender an official evaluation so it can finalize the mortgage terms.
- Pest inspection fee ($100 to $200). Getting a pest inspection is required for VA loans and in certain states, though not all. It should identify any rodents or insects such as termites in the house that could cause serious damage (if they haven’t already).
- Lead-based paint inspection fee ($224 to $420). If the house was built before 1978, you’d be wise to get a lead-based paint inspection. Lead-based paint can damage the brain and other vital organs if left unaddressed.
- Land survey fee ($300 to $950). Some mortgage lenders require you to get a land survey to confirm the property lines before closing.
- HOA transfer fees ($200 to $250). If the house is part of a homeowner association (HOA), you may be required to pay to have the HOA fee burden transferred from the seller to you.
Insurance-Related Closing Costs
- Up-front homeowners insurance ($800+). Most lenders require you to pay a year’s worth of homeowner’s insurance up front before closing.
- Up-front PMI ($50+). If you received an FHA loan and put down less than 20%, you’ll have to buy private mortgage insurance (PMI). This protects the lender if you default on the loan. Most lenders require you to put down the first month’s PMI before closing.
- Title insurance ($1000+). Title insurance protects against the loss of the house to a title claim. Reasons for this include unreported liens or easements, forged transfers of ownership rights, and basic errors. Lenders require you to insure them (with lender’s title insurance), but it’s also a good idea to insure yourself (owner’s title insurance). Usually, lender and owner title insurance are sold together in a bundle for a one-time fee.
Government-Related Closing Costs
- Up-front property taxes. The county will collect a prorated amount of property taxes from you upon closing. You may be required to pay up to a year’s worth of property taxes up front.
- Recording fee ($125). State and local agencies typically charge a recording fee to update the local land ownership records.
- FEMA elevation certificate ($170 to $2,000). The government requires you to get flood insurance if the house is in a high-risk flood zone. To determine whether it is, you may need a FEMA elevation certificate.
Other Closing Costs
- Title search fee ($75 to $100). You must pay a title search company to examine public records and ensure the property is free of any title claims, liens, or other issues that could prevent it from being sold.
- Attorney fee ($150 to $350 per hour). Attorneys can help coordinate the closing and title transfer. Most charge by the hour, but some charge a fixed fee. Though it’s not required in all states, hiring a lawyer is a good idea. An attorney can even help you save money by identifying poor terms of purchase.
- Escrow fees (1% to 2% of home price). Also known as closing fees, escrow fees go to an escrow company, attorney, or title company that conducts the closing meeting and distributes funds to third parties.
That sounds like a lot of fees. And they do not necessarily comprise all the possible closing costs you might incur. But keep in mind that every home purchase is different, so it’s impossible to say exactly which closing fees you’ll face.
Whatever you do, don’t be afraid to ask questions early on about what closing costs you’ll be responsible for, and try to limit them wherever you can. For example, you could negotiate with the seller to cover some of the closing costs (aka seller concessions), look for discounts with lenders, or apply for down payment assistance programs for first-time homebuyers.
Anything you can do to shave down closing costs will make it easier to travel that final stretch and become a homeowner. If you’re buying an investment property, you don’t want to run out of funds to pay for tenant and property management.
At the end of the day, you should feel comfortable with the final price. So try to identify all the closing costs well in advance.