When it comes to buying a home, a lot of real estate fees come into play that add thousands of dollars to the final amount paid. Many first-time home buyers who might think the down payment on the purchase price is all they have to worry about aren’t aware of the impending closing costs that loom in the distance.
What exactly is included in closing costs? Several fees lie under the umbrella of the term, including:
- Property fees
- Insurance fees
- Lender and loan-related fees
- Title company fees
Who pays closing costs?
To be frank, you do, in order to close your home loan. The average home buyer will spend between 2% and 5% of their loan amount on their total closing costs.
Overwhelmed? Don’t worry. Here’s a breakdown of what each fee covers, how much you can expect to pay for them and how you could potentially negotiate them.
Mortgage lenders are required to outline closing costs for products and services provided in the Loan Estimate and closing disclosure before the settlement day, and there are several that you could be hit with, so prepare in advance.
What is an origination fee on a mortgage?
The origination fee is charged by your lender for preparing and evaluating your mortgage. Your origination fee will cost you around 1% of your home loan. For example, if you got a loan for $500,000, your origination fee would be $5,000. Your lender may bundle these fees into one-line item, but they could also be broken down into what exactly you're paying for, such as underwriting fees and processing fees, which can include:
- Getting your documents together (Tax returns, pay stubs, bank statements, credit history, photo ID, renting history)
- Verifying documentation
- Analyzing your income
- Contacting employers and the IRS for information
- Ensuring your application is in order and meets criteria for government programs, or that it is eligible to be sold to investors.
What else does my lender charge me for?
Most lenders also charge the home buyer for prepaid interest, which is what is accrued on the mortgage in between the settlement day and the date of the first mortgage payment.
Applying for a loan? There's a charge for that. The mortgage application fee covers the cost of your new loan request, administrative expenses and your credit report, and the amount varies based on your lender and how long it takes to process your loan application.
If you're looking to reduce the interest rate you pay over your loan span and get better mortgage rates, it'll cost you in the form of "points." Home buyers who are planning to stay in their new home for a long time are among those who benefit the most from paying points because they can save more money in interest over the course of the mortgage. One point equals 1% of the loan amount.
Extra fees that you may see from your lender include attorney's fees (if you live in these states), an assumption fee if you take over the remaining balance of the of the seller's mortgage and a commission if you use a brokerage to find a loan, which could cost between 1% and 2% of your purchase price.
How do inspections and appraisals affect my mortgage?
Before you can secure your loan, the lender will want to make sure your future house is in upstanding condition before letting you borrow hundreds of thousands of dollars and will require a home inspection, which typically costs between $300 and $500. If the inspection results in some negative finds, you could potentially negotiate a lower purchase price, and if the problems are particularly severe, backing out of your contract could also become an option.
Lenders also want to make sure the home's value is equal to the mortgage they are lending you. An appraisal is an unbiased estimate of true value of the home's worth, and the bank relies on it to ensure the amount of money given to the home buyer is appropriate. If your home’s appraisal comes in under your mortgage amount, you’ll have to pay the difference between the loan and the appraised price in cash, or renegotiate the price.
The appraisal will cost around $500, and professionals will look at recent sales information for properties similar to the home, the property's condition and the location of the house.
What is an escrow account?
An escrow account will most likely be created for you at closing, which is used to collect and hold the portion of your monthly mortgage payment that goes towards property taxes, mortgage insurance and sometimes homeowner’s insurance. You may be asked to put in as much as two months' worth of these payments, and in some cases, the lender could ask for the entire first year of homeowner’s insurance up front. Your lender then acts as a middleman and pays those fees for you monthly.
Private mortgage insurance may be a requirement if you put less than 20% down on your home. It’s put in place to insure the lender if you happen to default, and the cost depends on your credit score and down payment. The higher both of these are, the less your mortgage insurance will be.
How do title fees affect my closing costs?
A title search will be conducted by the title company before closing to ensure that the current owner does in fact own the property and is not hiding any outstanding claims or liens against it. This research will cost you around $200 as it can be fairly tedious if the real estate records aren't computerized.
After the title is deemed "clear," meaning no one can show up on your doorstep claiming your home is theirs, title insurance is issued to you, which will cover you in case the title company missed something. There are two kinds of title insurance: the lender's title policy and the owner's title policy. The lender's policy, also referred to as a loan policy, insures the loan-holding bank if the home is lost due to a title claim (the purchase of this will most likely be required by your lender), and the owner's policy insures you.
The average cost of a title insurance policy consists of a one-time premium of $1,000, but the prices can vary. Sometimes the home buyer can negotiate a cost-sharing agreement for the owner's title policy, or even convince the seller to take on the entire financial burden of the policy.
Can I negotiate my closing cost fees?
Many experts suggest attempting to negotiate some of these fees down or even getting them waived. Consider attempting to haggle the following:
- Origination fee
- Home insurance fee
- Escrow for property tax and insurance
- Title insurance
You’ll receive a final closing statement (also known as a Closing Disclosure) at least a day before you close, and experts suggest comparing it to the initial loan estimate you received to check and see if any charges have changed. If changes have been made, be sure to ask you lender why.
Can the seller pay my closing costs?
In many cases, the lender will also allow the seller to pay for the closing costs. Sellers can sometimes be convinced to oblige if you sweeten the deal by offering to pay the full asking price for the home or agree to a quick closing. The latter method usually works well with sellers who are eager to get out from under their mortgage loan or have already bought another house and need to move quickly.
You can also potentially convince a seller to cover your fees by not avoiding any kind of neediness by asking them to make updates on their home before the sale and accepting the house "as-is," except for anything that was deemed unsatisfactory in your home inspection.
If the seller does not want to pay the full amount, you can try and meet them halfway by figuring out how much you are comfortable with contributing and asking them to pay for the rest.
If your negotiation tactics failed, your lender may be able to include some of your closing cost fees in your mortgage, but only if you have an FHA or VA loan. This option isn't available for those who have conventional loans. However, you must be advised before making this decision that both your monthly payment and your loan balance will be increased as a result.
Bottom line: Closing on a home isn't easy, but we're here to help. Working with Door ensures you will have a trusted partner to guide you along the process and make sure you're getting the best deal. Visit Door Mortgage and Door Title for more information.
Door.com is a next-generation real estate transaction platform designed to improve the client experience and reduce the costs associated with buying and selling a home. Door.com, Door.com Mortgage and Door.com Title deliver customized services with a team of full-time experts who use the best in technology to support the way you buy, sell and live with your home. Door.com operates throughout every major market in Texas (including Dallas, Fort Worth, Austin, San Antonio, and Houston), Georgia, Colorado and Florida