Closing Costs Explained
Let’s say that you have found a home you love, made the offer and it was accepted. Now comes those terms we all fear, one of which is “closing costs”! We are going to look at what those costs are, and how they will affect your home purchase.
First in line are non-recurring closing costs associated with the lender.
What? It’s simple, there are several fees associated with getting the lender to approve the loan. The most common are:
- Appraisal Fee: the home you are purchasing is going to be used a collateral for the mortgage. The lender will want to be sure that the property is worth what you are paying for it. The appraisal will be performed by a licensed professional who compares the “subject” property to similar properties sales in your area.
- Credit Report
- Flood Certification: this certification verifies whether your home is in a federally designated flood zone. If it is, you will be required to purchase flood insurance. In Florida, we always suggest flood insurance no matter where your home is located. It is not that expensive and covers water damage not insured by a standard homeowners policy, just in case.
- Loan Origination Fee
- Mortgage Brokerage Fee: Not all lenders require this fee, ask yours!
- Tax Service Fee: this fee is paid for monitoring your payment of property taxes
- Wire Transfer Fee: this is the cost to transfer funds from one account to another
There are a few other fees that may or may not show up on the lenders side. Those might include an Appraisal Review Fee, are used to verify an appraisal on higher-valued properties, Administration Fee, Document Preparation Fee, Underwriting Fee and a Warehousing Fee. Each of these should be listed on the HUD document and explained to you!
Pre-paids are expenses related to the purchase of the home which you will have to continue after the closing. They include:
- Homeowners insurance: you are generally required to pay 14 months of homeowner’s insurance at the closing. This covers the first two months while your mortgage is getting setup, along with the escrow amount to cover the next year in advance.
- Mortgage Insurance: Unless your down payment is more than 20%, you will be required to purchase mortgage insurance (PMI). Normally, you will need two months upfront.
- Property Tax: again, you will be required to pay property taxes into escrow in advance.
- Pre-paid Interest: this is the amount of interest that accumulates from the time you close until the first payment is due.
- VA Funding Fee: if you are using a VA loan, this fee is paid to the VA for guaranteeing the loan.
- Settlement Fees
These fees can, and probably will, show up on the closing documents. They are small in amounts, but large in numbers! What I mean is that although they range from $25 - $75, they add up.
- Courier Fee
- Homeowner’s Association Transfer Fee
- Pest Inspection Fee
- Notary Fees
- Recording Fees
- Title Insurance Premium: You pay this to make sure there is a clear title to the property and that, if sometime in the future, someone files a claim against the property, the title insurance will pay to defend against the claim.
Often buyers that we represent will ask for a ballpark estimate on closing costs. The answer is not that easy, each home is different. But, as a place to start, 3% of the cost of the property will be close.
Although this list includes the most common fees associated with a home purchase, there are most likely some that we missed. If you have questions about the HUD you received please ask questions before closing day. If there is a mistake or correction that needs to be made, it needs to be done well before we get to the closing table.