Understanding Closing Costs For Your New Home

Your offer has been accepted, your loan has been approved, and a date has been set to close on your new home. It’s an exciting time for sure, but there are a few things you’ll want to know before you sign your closing documents.

Key Takeaways

• Closing costs are typically split between the buyer and seller, but can be negotiated.
• Title insurance ensures the seller has a legal right to sell the home, and protects the buyer (buyer’s policy) and lender (lender’s policy) if liens against the home are discovered after closing.
• Your lender will give you a closing disclosure, letting you know exactly how much your closing costs will be at least three business days prior to your closing date.

Closing time

Once the underwriters have reviewed all of your loan documentation and the details about your property, they will issue an approval and it will be time to close your loan. To close your loan you will be asked to meet with a title or escrow company who has been chosen to handle your loan. They will walk you through all of the documents you need to sign and then record the transaction in the public records to signify that you are the new owner of the property.

Within three business days of your closing, your lender will issue a closing disclosure. This form will let you know exactly how much your closing costs will be, and will likely be similar to the estimated closing costs that were disclosed on your loan estimate which you received when you first inquired about a mortgage. There are limits to how much the lender fees on the final closing disclosure can vary from the loan estimate.

There are many documents you will sign at closing, and among them will be a breakdown of the fees you and the seller are paying. If you’ve negotiated for the seller to pay any of the costs associated with the transaction, you will see those items listed under the seller’s area.

Closing costs differ by area, and buyers/sellers can negotiate outside of these costs. The list below will help you understand what fees are typical and who generally pays them. This list is not exhaustive and is intended to be a general guide. What applies to your area or transaction may differ. Contact your mortgage loan officer for a complete list of your actual closing fees.

Buyer’s fees

Here is a list of fees the buyer can typically expect to pay:

Credit Report

The buyer pays the amount the lender is charged for pulling credit reports for all of the borrowers of the transaction. The credit report is used to evaluate your credit history and determine if the buyer historically pays their bills on time.

Appraisal

The amount that the lender pays to have an appraiser inspect the property and create a report to identify its features compared to similar homes in the area. The appraiser also provides the lender with the value of the property based on recent home sales (typically sales within the past six months).

Inspection

Although it’s not usually required by the lender, many home buyers hire an independent home inspector to go through the home and highlight any deficiencies or issues that may not be obvious to the buyer. Many buyers will make their offer contingent upon a satisfactory inspection and will further negotiate with the seller if major issues are discovered. Buyers sometimes pay the inspection fee directly to the inspector when services are provided, so this fee may not show up on the final fee breakdown since it’s not being paid with the loan proceeds issued at closing.

Title Insurance (or Title Charge)

Your home’s title guarantees your legal rights to own, use, enjoy, and sell your home. A title search will be conducted by a title company prior to closing to make sure the seller has the legal right to sell the home, and that there aren’t any encumbrances or liens that would prevent them from selling the home. Included in the title charge is an amount charged by the title company to insure against anything they may have missed when inspecting the title. If a future claim against your property is discovered, the title company will pay it if they could have discovered it when reviewing the chain of title.

There are typically two title policies required on a purchase transaction. The first one covers the lender since they are placing a lien in the amount of your loan, and need assurance that any future claims will be paid. The second one is an owner’s policy to insure you, the homeowner. Buyers generally pay the cost for the lender’s policy, while the sellers generally pay the cost of the owner’s policy that you will receive.

Recording Fees

Costs associated with recording the transfer of property to the appropriate government bodies.

Courier Fees

Covers the cost of transporting documents between the escrow service and various other entities.

Loan Origination Fee

This is a fee imposed by a lender to cover certain processing expenses in connection with making a real estate loan.

Discount Points

This is a prepaid finance charge tied to the interest rate (the higher the interest rate, the lower the discount points.) You can read more about buying points here.

Escrow Services

An escrow company will typically be responsible for distributing money to the people and companies involved in closing the real estate transaction. They are usually split between the buyer and seller, but can also be negotiated on who will pay them prior to closing.

Seller’s fees

Here is a list of fees the seller can typically expect to pay:

Escrow Services

This is described above, and relisted here because it is typical for buyers and sellers to split this fee 50/50.

Title Insurance

This is the cost for insurance which protects the new owner against a claim in the event that a lien or encumbrance that existed prior to their purchase of the home is discovered after they bought it. For example, a previous owner may have used the home as collateral on a loan they borrowed from a completely different lender. If that previous owner (who may not even be involved in this transaction) defaults on that loan, their lender has a legal right to collect the money they are owed from the value of the home. This is why a thorough title search is so important, and why the new homeowner needs title insurance to protect them if the company that performed the title search missed anything.

Excise Tax

An excise tax is a tax imposed on certain purchases, is collected at the point of sale, and then paid to the government. In the case of real estate transactions, the real estate excise tax (or REET) will be collected at closing and paid to the appropriate levels of government (local, state, or federal). REET may be paid on purchases of land and immovable structures built on the land, like a home.

Recording Fee

Local and state organizations will charge a fee for recording the property’s transfer of ownership in their records.

Real Estate Commissions

Real estate agents typically charge 3% of the sale price of a home as a commission for assisting either the buyer or seller. While these fees can typically be negotiated before working with a real estate agent, in total you can expect to pay between 5% and 6% of the home’s sale price.

As part of your Purchase and Sale Agreement, you can ask the seller to pay your closing costs and prepaid items. Please be aware that lenders may have limitations on the amount of seller contributions typically 3% to 9%, depending on the loan to value ratio.

Other possible closing requirements

Here are a few more things which may be required at closing:

• Water and sewer certification (if your new home is not on municipal and sewer facilities a certification may be ordered through your local health department to save you money)
• Building code compliance letter
• Mortgage insurance
• Survey

Escrow Accounts

Escrow accounts were originally established during the Great Depression of the 1930s, when Americans were unable to pay their property taxes because most of the nation was unemployed. It was hard enough at the time to come up with the money to pay for food and clothing, let alone a large tax payment.

Lenders worked together with the government to establish a way for people to stay in their homes by attaching an extra payment every month to their mortgage payment. Escrow accounts were set up to hold that money in reserve, until it was time to pay taxes. Collections for insurance were also added so that all houses would be covered in the event of fires or other hazards.

That practice was so effective that it continues today. Homeowners who use an escrow account are protected from the possibility of losing their home due to missed tax payments because the escrow company pays them on the homeowner’s behalf.

Your lender will recalculate how much money you need to pay monthly to keep your escrow payment properly funded for the coming year. If an increase is required, most lenders will give homeowners the option to pay a lump sum so their monthly payment amount doesn’t change —or— to have the amount divided into 12 equal payments and paid monthly with the mortgage payment.