When buying a home, of course home buyers are always thinking about the down payment. Your down payment can be 3%, 5%, 10% or more of the total purchase price. But, when some home buyers are planning on buying a home they forget about the closing costs associated with closing a home loan.
This why getting a good pre-approval and the loan started before you even look at homes is a good idea. By starting the financial piece early, you can talk in real numbers and know exactly what you need financially to close on a home.
What Are Closing Costs for Home Buyers?
Closing cost are the hard cost of closing on the loan and covers fees to the bank, recording fees, appraisals etc… Many of the closing costs fees are fixed while some are a percentage of the purchase price. When you google closing costs some websites will include pre-paids and escrows and some won’t.
Pre-paid and escrows should be considered because it is money you have to bring to the closing along with closing costs. But, for the sake of comparing loan products it is important to separate the closing costs from the pre-paids and escrows.
Closing cost including your pre-paids and escrows will typically run 1.5 to 4% of the amount of money borrowed. In Massachusetts if you purchased a home for $350,000 you could expect to pay about $6-8500 in closing costs, pre-paids and escrows.
Closing costs can vary from loan program to loan program as well as lender to lender. I am just going to touch on some of the more common fees you will see.
Origination: A fee a lender charges to originate your loan.
Points: Points are a percentage point and are used to pay down your loan to get a lower interest rate up front.
Underwriting: The fee for a lender to underwrite your mortgage.
Appraisal: Your lender is going to hire an appraiser to make sure the house is worth what you are paying for it.
Credit report: Any fees associated with pulling your credit report will be passed along to you.
Flood determination: A fee paid to a third party to determine whether your home is in a flood plain or not.
Survey: A lender will have a mortgage plot plan done to make sure you are not encroached upon or you are not encroaching on someone yourself.
Lender’s title insurance: An insurance policy that protects the lenders interest in the property.
Owner’s title insurance: This fee is optional but highly recommended. it protects, you the home owner of from any title issues.
Settlement: This fee is paid to the settlement agent or escrow holder. It could be a title company or an attorney.
Title search: Title run down. A search to ensure that their are no issues with the title to the house you are about to purchase.
Document Preparation: This fee covers the cost of preparation of final legal papers, such as a mortgage, deed of trust, note or deed.
Notary: This fee is charged for the cost of having a person who is licensed as a notary public swear to the fact that the persons named in the documents did, in fact, sign them.
Recording fees: This covers recording the deed and mortgage at the local registry of deeds.
Courier fees: This is to get the documents where they need to go in a timely manner.
Mortgage Insurance Premium: The lender may require you to pay your first year’s mortgage insurance premium or a lump sum premium that covers the life of the loan, in advance, at the settlement.
Pre-paids are not a fee. It is a cost that you are pre-paying before it is due. What items will need to be pre-paid when you close on a home?
Home Owners Insurance: You will be required to pay one year of home owners insurance in advance. This ensures the bank your property is insured on the day you close.
Pre-Paid Mortgage Interest: When you are paying your mortgage you are actually paying in arrears…. the month before. When you close on your mortgage you will be pre-paying the balance of your interest payment for the month. If you close on the 10th you would be paying approximately 20 days of pre-paid interest. If you close on the 30th you would be paying one day of pre-paid interest.
Escrows are a payment that are collected at a regular intervals that are held in account for future payments. It is most lenders policy to collect and pay taxes and insurance if you are putting less than 20% down on a home.
Taxes- At closing you will be asked to fund an escrow account for your property taxes. In Massachusetts taxes are due quarterly. You will fund enough to make your next tax payment and a couple of months extra as a buffer. From then on you will make monthly payments into
Insurance- The same as taxes you will fund your insurance escrow account a few months in advance and then make monthly payments so the bank can pay your next insurance premium in a year.
How Will I Know What My Closing Costs, Prepaids and Escrows will be?
There are two disclosures that your lender will be disclosing your closing costs, pre-paids and escrows to you.
Loan Estimate- The loan estimate will be provided to you with in 3 days of completing a loan application. This will give you a detailed line item breakdown of all the cash that will be need to close. Bear in mind at this point many of the fields will be estimated as you may not have a specific property in mind yet.
Closing Disclosure- The closing disclosure will be provided at least 3 days before closing. At this point you will be talking about a specific property and the numbers will be exact at this point. This gives you time to review the Closing Disclosure against the Loan estimate.
Can The Seller Pay Closing Costs?
Most loan programs will allow sellers to pay part or all of a home buyers closing costs. Asking for the seller to pay closing costs can certainly stretch the dollars you have to purchase a home.
In a buyer’s market it is not unusual for many home buyer to ask the seller to pay their closing costs, pre-paids and escrows. While in a seller’s market it may not be impossible to get a seller to pay some or all of your closing costs it can put you at a negotiating disadvantage.
Discuss with your agent first, if you actually need the seller to pay closing costs and secondly if you will be disadvantaged by asking for closing costs from the seller.
When You Sell Your House You May Have Money Sitting In Your Escrow Account
Often sellers forget about their escrow account. Because you are pre-funding taxes and insurance you are building up an account with monies in it.
When you sell your home you should be receiving your money from your escrow account within about 30 days from closing. Typically your mortgage statements will let you know how much money has accrued in your escrow accounts.
Summary of Closing Costs for Home Buyers
There are more financial obligations beyond just your down payment when you purchase a home.
Work closely with your buyer’s agent and loan officer so you have a good overview of what your entire financial commitment will be when you purchase a home.
Other Mortgage Resources:
- Kevin Vitali- Home Seller Closing Costs
- Luke Skar an Conor MacEvilly- Should I use a Mortgage Broker or a Bank
- Bill Gassett 7 Home Buyers Costs to Be Aware Of
- Anita Clark- Hidden Home Buyer Costs
Closing Costs for Home Buyers is provided by Kevin Vitali a Massachusetts REALTOR. If you would like to sell your home or buy a new home give me a call at 978-360-0422 and let’s get the process started.
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