Most people know that there are expenses associated with purchasing a home, but those expenses and who is responsible for paying them, is widely misunderstood. For instance, the home appraisal, which is usually ordered by the lender, will be the responsibility of the borrower–in one way or another. The pest inspection, along with the home inspection, are also costs the buyer must incur.
In addition to these expenses, there are more, which are commonly called “closing costs”, a series of costs which consists of various, necessary items in order to facilitate the purchase of a home. In down and normalized markets, these costs are typically placed on the buyer; however, in a seller’s market, the settlement costs can be paid by the seller. Ordinarily, the party purchasing a home is the one which incurs these costs, which might seem unfair, but is nevertheless a reality.
The closing, or “settlement”, is when legal transfer of the property is done officially and it’s also when the transaction will be recorded by the local real estate municipality. Because there are so many I’s to dot and T’s to cross, the associated costs are usually substantial but can be reduced, if you do your homework ahead of time.
How Much are Closing Costs Typically?
Depending on the bank and the borrower’s financial situation, settlement costs or closing costs consist of several fees the mortgage lender passes on to the buyer. While the seller, in the majority of cases, pay the real estate sales commission to the listing agent and the buying agent, the seller does not usually incur the expenses associated with closing costs. This does happen in the when the real estate market is heavily in-favor of the seller because it’s used as an enticement to attract buyers. The prospect of paying less tends to be quite effective in getting purchase offers and the seller isn’t necessarily out because they are likely to get at least their asking price; and, quite possibly more than their listing price.
“After you’ve made your down payment on a home, you may feel tapped out, but closing costs normally will require you to reach even deeper into your pockets. When a home is sold, both buyers and sellers typically end up paying settlement fees. The amounts vary significantly from region to region and depend on the purchase agreements that buyers and the sellers reach during their negotiations.” —Realtor.com
On average, you can expect to pay between 2 percent and 5 percent of the purchase price. So, for a home purchase of $200,000, the closing costs would range between $4,000 and $10,000. A home purchase of $400,000 would range between $8,000 and $20,000. While a home nearing or at $900,000 will cost approximately $18,000, up to $45,000.
Lenders are required by law to give all buyers a GFE or Good Faith Estimate of these costs, typically three days before the settlement date. Within a day of settlement, the lender will also provide a buyer with a HUD-1 statement, which is a line-item document, outlining each expense and the cost of each.
What are Closing Costs?
You might be surprised to learn these fees are not fixed, they are negotiable. Borrowers can usually negotiate the costs, and will find some which are unnecessary. Lenders work as much as they legally can into closing costs, so, it should be known that buyers are not without power to lower their costs.
Settlement costs generally include a laundry list of expenses such as:
- a charge for the cost of checking the borrower’s credit files;
- a loan origination fee;
- any attorney’s fees;
- the appraisal fee;
- discount points;
- survey costs which establish the property lines;
- title insurance and title search fees;
- county recording fee; and,
- the underwriting fee.
These do not necessarily include the home inspection fee, pest inspection price, and the earnest money deposit. Such expenses can add-up quickly and should be factored into the true cost of purchasing a residential property. There’s also other costs which buyers incur, like new home decor, perhaps furniture, and other living necessities. Those add to the list and can really be a drain on the wallet.
You can avoid paying closing costs, but it will still cost you, nonetheless. For instance, you can work the closing costs into the mortgage loan. This is done through a loan product referred to as a no-closing costs mortgage; and, these debt instruments do cost more in the long run. Because they are rolled into the home loan, they will up your monthly payment as lenders typically approve such deals with a higher interest rate.
In addition, you can also work with your buyer’s agent and the seller’s agent to have the seller incur some of the closing costs. This is usually possible when the seller is under pressure to keep the purchase on track for the sake of their career or because they’ve already purchased another home.