Purchasing a home goes beyond saving for the down payment. Homebuyers and sellers need to account for closing costs, which are various fees related to finalizing a real estate deal.
What is included in Closing Costs?
Closing costs refer to the fees and expenses that buyers and sellers incur while completing a real estate transaction. These typically include:
- Loan origination fees: These are charged by the lender for processing the new loan application.
- Appraisal fees: The cost of assessing the value of the property.
- Credit report fees: This is the cost to pull the borrower’s credit history and scores.
- Title search and insurance: These are costs related to verifying the property’s ownership and protecting against future claims against the property.
- Escrow deposit: A portion of the upcoming property taxes and mortgage insurance, put in escrow.
- Recording fees: Fees associated with legally recording the new deed.
- Underwriting fees: Costs associated with verifying the loan application details and finalizing the loan.
Closing Costs Calculation
- Homebuyers: closing costs usually range from 2% to 5% of the property’s purchase price.
- Homesellers: typically pay between 8% to 10% in closing costs, with the bulk of this being real estate agent commissions.
The exact amounts vary based on factors such as the size of the loan, the practices of individual lenders.
Closing Day Payments
Most closing costs are due on the day the property changes hands, also known as the closing day. However, some fees, like inspection and certification costs, may be paid before the closing day.
Closing costs for buyers
Homebuyer closing costs consist of one-time fees like:
- appraisal fee
- application fees
- homeowners insurance
- property taxes
These costs can be bundled differently by lenders and title company. Cash buyers, while exempt from mortgage-related fees, still incur costs such as notary fees, property taxes, and often, optional expenses like appraisals and inspections.
Closing costs for sellers
Sellers often cover:
- real estate agent commissions
- transfer fees
- Tax
- title insurance
- escrow and closing fees
- prorated property taxes
- HOA fees
- credits towards closing costs
- attorney’s fees (optional)
Understanding the Closing Disclosure
A Closing Disclosure is a document provided by the lender outlining the final terms of the mortgage loan, including the loan’s interest rate, monthly payments, and a detailed breakdown of closing costs. This document is typically received at least three business days before closing, providing an opportunity for the borrower to compare it with the initial Loan Estimate and ask any questions or clear any doubts before finalizing the transaction.
Addressing Errors in Loan Documents
Errors in loan documents can cause a significant disruption to a real estate transaction. If you identify discrepancies, immediately notify your lender or settlement agent. They are obligated to correct the errors and potentially postpone the closing until the documents are accurate. It’s crucial to carefully review all documents to avoid financial or legal complications down the line.
Understanding closing costs, significant expenses in real estate transactions, is crucial for effective budgeting and seamless property deals for both buyers and sellers.
