Closing costs are fees that are incurred during the whole process of the loan application. These costs are summed up and paid at the closing of the real estate transaction. The fees include lawyer’s fees, title service cost, appraisal fees, inspection fees, and more. Either the buyer or the lender can pay the fee, depending on the arrangement. They can even split the costs.
Here, we will help you understand further the charges included in the closing costs, where to get the money from, and how to save on the costs.
Types of Closing Costs
To understand the charges included in the closing costs, it helps to break them down into types.
1. Charges for establishing and transferring ownership
- Title insurance
- Title search
- Legal fees
2. Amounts paid to state and local governments
- Prepaid Property tax
- Recordation fees
- City, county, and state transfer taxes
3. Mortgage-related costs
- Loan origination fees
- Discount points
- Appraisal fee
- Survey fee
- Application fee
- Homeowner’s & Hazard Insurance
- Mortgage Insurance
Who pays the closing costs?
Now that you know what fees are included in the costs, here comes the next question: “Who pays for all these costs?” The list looks overwhelming and the thought of having to pay all that can cause borrowers a headache. It should bring you relief to know that you don’t necessarily have to shoulder all these fees. Negotiate with your seller to pay some of the charges in the total closing cost. For FHA loans, up to 6% of the home’s value can be paid by the seller.
Can I get an estimate of the closing costs?
The general estimate of closing costs is 3-4% of the property value. For example, if the property you wish to purchase is $100,000 then the closings costs may range from $3,000 to $4,000.
Fortunately, FHA loans have maximum fee limits to make sure the properties are still affordable. These limits vary from one state to another so make sure to check with your local lenders.
Lenders are required to provide borrowers a Good Faith Estimate within 3 business days from the date of loan application. It is good to know that lenders are bound by law to stay within the key terms of their Good Faith Estimate. They are not allowed to increase the lender’s origination charge. Once the mortgage rate is locked, the discount points charged for the loan cannot be raised. These costs may be decreased by the lender but never increased.
Can FHA closing costs be financed?
Buying a home through conventional mortgage loans requires you to pay closings costs upon transfer of deed. This is on top of the down payment which is at least 3.5% of the mortgage value.
However, for FHA loans, you are allowed to roll the closing costs into your mortgage balance.
It is important to know that even with lenient FHA loan guidelines, borrowers cannot include the closing costs. They are considered separate from the minimum down payment requirement.
Talk to your lender about your closing cost financing options.
How to save on closing costs
City and state taxes vary greatly in different parts of the country. This has a huge impact on the closing costs. Borrowers in some areas only pay around 2-3% for closing costs, while those who wish to purchase homes in areas that are considered high-tax can pay up to 5-6% for closing costs alone.
2. Shop around
Shopping around does not only apply when deciding which home to purchase. When looking for lenders, interest rates, and down payment options are on top of the list when narrowing down your choices. Another factor you shouldn’t miss is the closing cost. Ask for good faith estimates. Ideally, it is good to get at least 5 good faith estimates from different lenders. This should give you enough options.
4. Review closing cost forms
Once you have a couple of the estimates, examine the items on the forms and watch for fees that one lender is not listing or is much lower than others. Some lenders purposely use a very low figure to make the overall estimate look low.
After looking at the details of what’s included in the closing costs, you can save on some of them by negotiating with the seller. Closing the deal is just as important for the seller as it is for you so don’t hesitate to negotiate. Based on market conditions, both parties can come up with an agreement to split the closing costs. There is surely a way to make it a win-win.
Having to deal with the process of getting a home and dissecting the costs involved can be daunting. However, do not get intimidated. You just need to be well-informed and use your negotiation skills to save on closing costs.