Buying a house is — without any doubt — expensive. For most folks, it’s the single biggest expense they’ll ever take on in their lifetimes.
But you know that already, right? You’ve been to the bank, you’ve gone through your financial papers, had a credit check and been pre-approved for a mortgage, so you know exactly how much you can spend. Your bid on your new home was well within your budget.
Unfortunately, you still have to contend with closing costs.
What Are Closing Costs?
Closing costs are all the expenses that go along with a home’s sale and purchase in addition to the home’s actual price.
Both buyers and sellers have closing costs they’re typically expected to pay, although there may be some negotiations about who actually pays which expense. A buyer can typically leverage a soft real estate market against a seller’s desire for a quick sale to get the seller to pay more of the closing costs. Likewise, sellers can leverage a hot market in their own favor to get buyers to shoulder more of the closing costs.
Closing costs will vary from lender to lender. Usually, closing costs will range from $2000-$3500.
If you totally weren’t expecting this, don’t panic: While a few of the costs have to be paid up front, a large chunk of the expenses will ultimately be rolled into your mortgage.
What are Prepaids?
Prepaid costs include 1 year’s worth of homeowners insurance premium along with per diem interest. In addition, 2 months of property taxes and 2 months of insurance for the buyer’s escrow account. These amounts will vary significantly based on the cost of the house, the property taxes and the buyer’s homeowners insurance company. You should expect to pay between $2,000 and $5,000 for prepaids.
What Do You Need to Pay Before Closing?
These are the ones that can be hard to manage if you weren’t aware they were coming — but they’re fairly limited. Commonly, you will need:
Earnest money is a cash deposit you make on the house to seal your offer and show the seller that you’re serious. It also serves as a guarantee for the seller that you’ll go through with the deal. As long as you do, the earnest money is credited back to you at the closing. If you back out without a legitimate reason, the seller simply gets to keep the cash as compensation for taking their home off the market for a while.
Typically, this is 1% to 2% of the home’s purchase price, so that would be between $2,500 and $5,000 for a $250,000 home — although you could find yourself offering much higher in a competitive market in order to make your bid more attractive.
Most buyers make their offers with contingencies — conditions that have to be met for the sale to go through. Making certain that the house will pass an inspection is a routine contingency (especially because most lenders won’t hand over the money for a home loan without it).
Inspection fees are typically only a few hundred dollars, but you may have to pay for more than one. For example, a general contractor might do the home inspection, but you may need a different type of inspector to check the home for pests or problems with the septic system.
This is another one that you probably can’t avoid since most lenders want to make certain that you’re not paying more than fair market value for a home. An appraisal gives the lender reassurance that the property is worth enough money to cover the loan they’re about to give you.
Again, you can expect to pay several hundred dollars up front for a home appraisal.
Most lenders require 1 year’s worth of homeowner’s insurance to be paid prior to closing. The amount of the insurance will depend upon the buyer’s homeowner’s insurance agent. The buyer can shop for this on their own.
What Do You Need to Pay at Closing?
Along with any down payment you’re going to make on your new home, there will be a slew of closing costs that will be rolled into your home loan. You should get an early sense of how much you’ll have to pay when your lender gives you a Loan Estimate (also called a “Good Faith Estimate”), and it will include things like:
- An application fee: This basically covers the cost of pulling your credit and processing your loan application.
- A loan origination fee: This is basically your lender’s administrative costs for underwriting the loan. It can include notary fees, document preparation and more.
- Points: You can sometimes lower the interest rate on your mortgage by paying “discount points,” which are equal to roughly 1% of your loan per point.
- Private mortgage insurance: Known as “PMI,” this is usually required unless you’re able to put 20% on the home’s purchase price down immediately. It insures the lender against a possible default.
- Initial mortgage premiums: You need home insurance, and some lenders require you to pay up to a year’s worth of premiums at closing.
- HOA assessments: If you’re buying into a planned community, you may have homeowners association fees that need to be paid in a lump sum.
- Title search fees: Title searches make sure that the seller really has the right to convey the property to another without encumbrances.
- Title insurance: Most lenders require this — just in case there’s a mistake with the title search and a claim against the property crops up later.
- Recording fees: This is the cost of properly recording the property’s transfer from the seller to you.
Finally, you need to remember that your real estate agent has to be paid. Typically, both the buyer’s and seller’s agents are paid by the seller out of the proceeds of the sale.
The good news, again, is that most of these fees won’t be coming directly out of your pocket at closing. Just the same, it’s a good idea to make sure that you go through each item on your loan estimate to make sure that it’s in line with what you are expecting. You don’t want any unpleasant surprises when you meet to sign the final documents.