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  Step 4:    What Will My Closing Costs Be?                          1   2   3                                     

What Will My Closing Costs Be?

Everyone has heard of closings and closing costs, but it seems there is always confusion where closing costs are concerned. The majority of questions we hear are general in nature.

What are all the closing costs? How much will they be? Can these fees be reduced? When do I have to come up with all this money? Can I finance my closing costs? Can someone else pay my closing costs?

There are actually closing costs for both Seller and Buyer. Typically the majority of buyer’s closing costs are fees related to their financing. Buyers usually are responsible for loan closing costs including:

• Loan Origination Fee- usually 1% of loan amount, this is a fee that represents the majority of the lender’s income for their work on your loan.
• Discount Points – Not always a closing cost, discount points are negotiable with every lender. They are best described as interest paid in advance to reduce the interest rate on your note, and therefore, your payment.
• Processing Fee – This technically is another fee that represents income to your lender, but in reality, they really do use this money to compensate the processor who works on your loan documents, and packages the loan for underwriting.
• Underwriting Fee – Most lenders have contract underwriters who are specially trained to ensure the lenders guidelines are met when they make loan decisions. This fee pays for that service, and truly does allow lenders to offer better and faster underwriting decisions.
• Lender’s Title Policy - In most states, it is customary for the seller to pay for the title insurance policy, an insurance policy that insures that they indeed own the property described, and have a right to transfer that property to you. It makes sense that you would expect the seller to prove their ownership. The Owner’s Title Policy protects you…however the lender requires a policy that protects them, as well (the Lender’s Policy).This policy is issued at the same time as the Owner’s Policy, and is much less expensive, too.
• Recording Fees – Once you purchase your home, you will want all the documents to be legal. In most states, in order to be legal, your note, mortgage (or deed of trust), and deed must be recorded in public records. There is typically a fee associated with this process.
• Tax Stamps – Another fee levied by some state or local governments, usually a percentage of the purchase price, and generally associated with the recordation of closing documents.

Pre-paid expenses are not exactly closing costs, but they are a necessary expense, and they are generally lumped together with closing costs. Typical pre-paid costs are:

• Insurance – You will usually be required to pay an entire year of property insurance in advance, plus place several months of insurance payments into an escrow account set up by your lender. This way, you will pay 12 equal monthly payments of taxes and insurance into an escrow account and your lender will be able to pay those items on time on your behalf. This will make it easier for you to budget these items instead of being faced with large payments once a year. It also allows your lender to be sure that your home does not go un-insured or property taxes aren’t delinquent.
• Property Taxes ( based on the number of days in the current year you will own the property. If the seller has already paid the taxes you will have to pay your share. If the seller hasn’t paid the taxes yet, you will be credited for the portion they used, but you will be responsible for paying for the entire years taxes in that case.
• Mortgage Insurance – If you put a small or no down-payment on an FHA or most conventional loans, your lender will require a mortgage insurance policy. This policy only protects the lender in the case that you default on you mortgage. Many people will say “But it doesn’t benefit me, why should I pay for it?” The answer is, it is the only way that you are able to put such a small down-payment. Your grandfather probably had to save a 20% down payment.

When you apply for a mortgage loan, your lender is required to send you an estimate of your closing costs. This is called the Good Faith Estimate. Keep in mind, this is an estimate, it is not usually exact.

Most loan programs allow the seller to pay all or a portion of your closing costs, if they are negotiated in the contract. In this way, you are essentially financing your closing costs. Keep in mind, for every dollar of your closing costs the seller agrees to pay, they are receiving less money at closing. If the seller agrees to pay $4500 of your closing and pre-paid costs on a $150,000 home, they would get the same amount of money as if they’d sold the home for $145,500. It is a good idea to keep this in mind when negotiating with a seller on a home you really want.

Finally, you can expect an accurate settlement statement before you close, or HUD-1 as they are sometimes called because of the form required on residential transactions. This form will show exactly how all the funds will be disbursed. It is a good idea to have your Realtor® review this document with you so that you understand every item on it, and so any mistakes are caught prior to closing.

Most closing costs where a lender is involved will total between 2-4% of the purchase price, depending on the purchase price, and the loan amount. Ask your lender to keep you informed at all times regarding your closing costs, and enlist the services of a competent Realtor® to help protect you from oversights or predatory lenders.