Buyer's Closing Costs
Buyer's Closing Costs
Closing costs are the costs to close a home sale additional to the sale price agreed to by the buyer and seller. Because the seller will most often pay real estate commissions and excise taxes, their closing costs will usually be 9 to 10% of the sale price. A buyer's closing costs will be 1 to 6%. That is a very large range but we need to keep in mind that most of the buyer's closing costs are related to the home loan and cash buyers do not need to pay these costs.
A cash buyer will pay an escrow fee, recording fees, some property taxes, utilities and maybe some HOA fees. A borrower will pay these closing costs as well as the additional costs related to closing the loan. Some types of loans cost more than other loans. Borrowers with higher credit scores will generally qualify for less expensive loans. Higher loan to value ratios make for more expensive loans. Very large, non-conforming jumbo loans are more expensive. Very small loans can cost more when the costs are expressed as a percentage of a loan.
All loans have closing costs, though they are not always an out of pocket expense to the borrower. Some home loan programs allow for the seller to pay the buyer's closing costs. This would likely affect the negotiated sales price. Some loans allow for the buyer to finance some or all of the closing costs. Sometimes some of the closing costs can be hidden with higher interest rates; as explained in the next section.
Loan Origination Fee
A loan origination fee is the money that the lender makes for their work including processing and underwriting. Of all the buyer's closing costs, this is the most complicated and least transparent. For our purposes we will say this is 1% of the total loan amount but it can get way more complicated than that.
The lender can be paid for their services on the front end which is reflected in the loan origination fee. They can also be paid on the back end which means that they get paid by the mortgage holder. This would likely result in a little higher interest rate.
You can pay more up front to buy down your interest rate. This process is called paying points. A point is 1% of your total loan amount. You can expect that your interest rate will be lowered between 1/8 and 1/4% for every point that you pay. You may also see negative points on a loan. This will lower the closing costs but increase the interest rate you pay.
As a base line, a loan at the current market interest rate will have about a 1% total origination fee. This is something that can vary and is negotiable. To compare one lender to another, it is best to get a Good Faith Estimate from each lender. When compared to each other it is likely that one will have a lower interest rate and one will have lower upfront costs. A loan with a higher upfront expense and lower interest may prove to be less expensive over time, but if a borrower refinances or sells their home a short time later, the lower upfront costs become cheaper.
An appraisal is a value estimate made by a licensed appraiser for the purpose of financing. This is normally done using similar homes that have sold within the last six months in the area, which are called comparables or comps.
A typical appraisal will cost about $500. This is paid for by the borrower whether or not the loan closes. This is a closing cost that may actually be paid outside of closing.
The lender will run a credit report on the borrower to ensure that they are a good risk. The borrower will normally be required to pay for this service regardless of whether or not the loan closes. This is another closing cost that is sometimes paid outside of closing.
If there is more than one person on the loan application, this would require multiple credit checks. This expense should be under $60 and can even be as low as $10.
This is a fee paid to a tax service provider for information on the real estate property tax. Not all lenders charge this; I would say most don't. I have seen this service cost from $60 to $80.
This is a fee paid to a third party service provider for information on whether the property is in a flood zone. Flood certification will be required by the homeowner's insurance underwriter but is not a significant expense. This cost will be around $10.
A recording fee is the fee charged to make a document public record. When a title search has been performed on a piece of property and title has been insured, the next step is to record it with the county to make it a public records. If another party was ever to try and exercise the privilege of ownership over that piece of property, it would be very clear that they had no rights to that property. Examples would be if someone else wanted to occupy, sell, build, borrow against, divide, or grant an easement, it would be determined very quickly that they had no rights to this property.
The document associated with title is a deed and that is the document that gets recorded. In a cash transaction, this is often times the only document that needs to be recorded. If the property is financed, the mortgage against the property will also need to be recorded. It is not uncommon to see additional recordings related to a transaction such as easements and road maintenance agreements.
Government recording fees will generally be between $65 and $85 each. On a home purchase that is financed, you can expect to see two recording charges. Additional recordings required to close the deal will often be paid by the seller; these are often steps that are required to make the property sellable or financeable.
Home mortgage payments are invariably due the first day of the month and become late on the 10th day. Interest is paid in the rears, which means that the borrower is paying the interest for the previous month with each payment. Houses do not always close on the first day of the month; they close any time throughout the month.
For example, if a home were to close on the 17th of October, the first payment would be due the first of December. The borrower would pay the interest owed for November with that payment. The interest for the last 14 days of October is played at closing. If a home closes early in a month, the closing costs will be higher but the first payment will not be due as soon.
Mortgage Insurance, sometimes referred to as PMI, will be required on a loan with a loan to value ratio higher than 80%. This means that the buyer put less than 20% down. Because a loan of this type is a higher risk to the lender, they require the borrower to pay mortgage insurance. Mortgage insurance will be part of the borrower's monthly payment. It is normal for the borrower to be required to pay one month's mortgage insurance in advance at closing.
Homeowner's insurance insures against damage to the actual structure or structures on the property. This will be about .5% of the replacement cost of the main structure on the property. When the borrower has an escrow account, sometimes referred to as an impound account, this will be paid with their monthly mortgage payment. It is very common to see one month of homeowner's insurance paid up front at closing.
Property taxes in Spokane County are paid two times each year. The first payment is due April 30th and is for the first half of the year; through June 30th. The second payment is due on October 31st and is for the second half of the year. At closing, the seller is responsible for the property taxes until the date of closing and the buyer is responsible for any taxes due from that day forward.
Here is where it can get complicated. The buyer may owe the seller for property taxes that they have already paid or the seller may owe the buyer for taxes that have not been paid yet. A daily tax liability will be calculated and this will be reflected as a credit or debit to the buyer, as in the examples below.
If the sale closed on February 1st, the taxes for the first half of the year would not have been paid. The new buyer will need to pay these taxes by April 31st. The seller will pay for January's portion of these taxes to the seller at closing.
If the closing date was June 15th, the seller would be liable for 15 days' worth of taxes that the seller already paid. The buyer would pay this to the seller at closing.
Title insurance is to ensure you have a clear title on your real estate investment. Title insurance is a unique form of insurance in that most types of insurance insure against damages that may occur in the future, title insurance insures against issues from the past.
Over the years, properties often change hands many times. Property can be divided. Property boundaries can change. Different types of easements can be granted that encumber a piece of property. Often times more than one person has ownership of a piece of property. There are different types of joint ownership. People owning property get married, divorced, and pass away. Heirs inherit property, often times multiple heirs. These and other circumstances make it so ownership is not always completely cut and dry, which is why it’s necessary to protect your investment with title insurance.
Owner's title insurance is the seller ensuring to the buyer a marketable title. Owner's title insurance will be for the full value of the property and the seller pays for this insurance policy.
Lender's title insurance is paid by the borrower to ensure clean and marketable title to the lender. Lender's title insurance is not for full market value, but only for the amount of the loan. For conventional sized loans, you will see between $250 and $500; the larger the loan, the greater the cost.
Closing service or title service is the money paid for the actual service of closing the transaction. This service may be provided by the title company or by another closing agency. This cost is usually paid equally by the buyer and the seller, though there are exceptions.
Charges for closing services will start at about $700 for smaller transactions. The buyer will pay half of this or about $350. This fee will increase based on the sale price of the home. It will about double for a $500,000 home.
An escrow account is sometimes referred to as an impound account. This is money set aside for taxes and insurance. Additional money will be collected for the escrow account from the borrower with each month's payment. The lender servicing the loan will pay property taxes, homeowner's insurance and mortgage insurance from this account.
An escrow account will be required by the lender on loans with higher than an 80% loan to value ratio. Even on loans where they are not required, they are a good idea. At closing, money will be collected from the borrower for the initial funding of the escrow account.
It would be typical to see one month's mortgage insurance, three month's homeowner's insurance, and 6 month's property taxes. There may also be what is called an aggregate adjustment if the sum of these is higher than the legal limit.
VA Funding Fee
VA Home Loans require an additional funding fee that is added onto the loan. This funding fee is to guarantee the loan and replaces mortgage insurance. For regular military veterans who put no money down and are using their VA loan for the first time, the funding fee is 2.15%. This amount goes down if the veteran puts more money down. The funding fee is a little higher for veterans of the Reserves and National Guard. They can also have a little higher rate if it is not the first time the veteran has used their VA loan.
A home inspection is not normally considered a closing cost. It is paid for outside closing but is an expense incurred by the buyer for the transaction. A home inspection is paid for by the buyer and performed by a licensed home inspector. It is normal to pay $400 or $500 for this service. The price of the service may vary depending on the size of the home and the services provided.
written by:Todd Hays