Buyer Closing Costs Explained

One of the biggest questions I get from people buying their first home is "What are closing costs and how much will we have to pay?"  Closing costs are the costs that are associated with buying a home.  They are paid at the close of escrow.  The most common closing costs are the fees related to obtaining the loan, appraisal fees, title fees, escrow fees, and prepaid items such as taxes and insurance.  Many times the exact amount of the closing costs is not know until right before the day of closing because they are prorated through the day escrow closes.  You will however have a good idea of what they will be by taking a look at the settlement statement provided by escrow.  The settlement statement or HUD1 lists all the financial details of the transaction.  It is important to review this document and understand the charges.

Closing costs are negotiable between the buyer and the seller at the time you are submitting the offer.  You can ask the seller to cover all or part of the closing costs you will need to pay.  This is why it is a good idea to have an estimate of what your closing costs will be before you submit an offer so you know how much to ask for.  Make sure you are prequalified with a lender in advance and have an idea of how much your closing costs will be.  If you are fortunate enough to get the seller to agree to pay some or all of your closing costs you may need to only bring in your down payment and pay for the out of pocket costs such as the home inspections.

The majority of closing costs are associated with the loan.  These costs will vary from lender to lender.  The loan origination fee is the lender's commission.  It is how much the originator receives for getting you qualified for your loan.  It is typically about 3%.  The appraisal fee is about $450+ and usually needs to be paid prior to closing (out of pocket).  Courier fees cover the costs of send paperwork back and forth between escrow, title and the lender.  Notary fees are charged for notarizing the loan docs/deeds.  Escrow fees pay for the escrow services.  Title fees cover the costs to check on and insure a clear title.

Pre-paid items could include insurance and taxes.  Buyers usually have to have a valid insurance policy/binder showing they have paid the insurance for the first year, hence the term pre-paid.  Property taxes are prorated to the day escrow closes.  The seller pays for the amount of time they owned the property so a charge or credit will be applied depending on what has been paid.  The lender may require the buyer pay a number of months of taxes and insurance into an "escrow" or "impound" account.  Taxes and insurance charges are then added and included in the monthly mortgage payment and a portion is deposited into this account.  The mortgage company will then pay the taxes and insurance out of this account. 

And finally you should make sure you have the money to do any and all home inspections that you want.  These will not show up on the HUD and will need to be paid out of pocket at the time of the inspection.  They typically run between $300-$500 for a general inspection depending on size and type of home.  If there is septic or well on the property those can run about $400 a piece.  These are just a few of the inspections you may want to have done.  The costs of doing inspections can add up but knowing what you are buying and having the home checked by a qualified professional is priceless.