The bundle of fees associated with the buying or selling of a home are called closing costs. Certain fees are automatically assigned to either the buyer or the seller; other costs are either negotiable or dictated by local custom.
When a buyer applies for a loan, lenders are required to provide them with a good-faith estimate of their closing costs. The fees vary according to several factors, including the type of loan they applied for and the terms of the purchase agreement. Likewise, some of the closing costs, especially those associated with the loan application, are actually paid in advance. Some typical buyer closing costs include:
- The down payment – This is the amount that the buyer is not financing but rather pays from their own funds. Typically part of the down payment is due 10 days after attorney review is completed and is held in the seller’s attorney’s trust account until the closing. The other part of the down payment is due at the closing and is payable by a cashier’s check
- Loan fees (points, application fee, credit report) “Points”, or, loan discount is a one-time charge used to adjust the yield on the loan to what market conditions demand. One point is equal to 1% of the loan amount. This fee is rare when interest rates are low.Application Fee covers the lenderÂs cost to process the information on your loan. Usually, you must pay this charge at the time you file the application. Some lenders may apply the cost of the application fee to certain closing costs. Generally, lenders do not refund this application fee if you are not approved for the loan or if you decide not to take it.
- Credit Report Fee: This one-time fee covers the cost of the credit report that is run by an independent credit reporting agency and is usually about $60-$75
- Prepaid interest – Depending on the time of month your loan closes, this charge may vary from a full month’s interest to just a few days’ interest. If your loan closes at the beginning of the month, you will probably have to pay the maximum amount. If your loan closes at the end of the month, you will only have to pay a few days’ interest
- Inspection fees – The cost of conducting homes inspection , Radon Inspection Oil Tank inspection and the like
- Appraisal – This fee ($150 to $400 depending on the price of the home) pays for an independent appraisal of the home you want to purchase. The lender requires this estimate of the market value of the house for the loan. The appraisal is a critical factor in determining how much of a mortgage the bank or mortgage company will approve. After the appraisal is completed, the borrower is normally entitled to a copy of the appraisal from the lender.
- Mortgage insurance (typically 1 years premium plus an escrow of 2 months)
- Hazard insurance (typically 1 years premium plus an escrow of 2 months)
- Title insurance – Rate per $1,000 or Fraction Thereof
- Title Search – $250-$600
- Attorneys’s Fees – $700 – $1800
- Other Costs – may be involved depending on the transaction value and other factors
If the seller has not yet paid for the house in full, the seller’s most important closing cost is satisfying the remaining balance of their loan. Before the date of closing, the escrow officer will contact the seller’s lender to verify the amount needed to close out the loan. Then, along with any other fees, the original loan will be paid for at the closing before the seller receives any proceeds from the sale. Other seller closing costs can include:
- Broker’s commission
- Attorney’s fee
- Transfer taxes
- Documentary Stamps on the Deed
- Title insurance
- Property taxes (prorated)
Negotiating Closing Costs
In addition to the sales price, buyers and sellers frequently include closing costs in their negotiations. This can be for both major and minor fees. For example, if a buyer is particularly nervous about the condition of the plumbing, the seller may agree to pay for the house inspection.
Likewise, a buyer may want to save on up-front expenditures, and so agree to pay the seller’s full asking price in return for the seller paying all the allowable closing costs. There’s no right or wrong way to negotiate closing costs; just be sure all the terms are written down on the purchase agreement.
At the closing, certain costs are often prorated (or distributed) between buyer and seller. The most common prorations are for property taxes. This is because property taxes are typically paid at the end of the year for which they were assessed.
Thus, if a house is sold in June, the sellers will have lived in the house for half the year, but the bill for the taxes won’t come due until the following year! To make this situation more equitable, the taxes are prorated. In this example, the sellers will credit the buyers for half the taxes at closing.