Ok, so you know you need a big chunk of cash to pay the Lender for a Down Payment on that house you want to buy. You may even know about the Earnest Money Deposit; that smaller chunk of money that your Real Estate Agent told you about. And, sure, somewhere along the line the words “Closing Costs” may have been mentioned but when you see the amount necessary to close the loan for your new home, printed in black and white, it’s a whole other story for many Home Buyers.
Wow!
As a rule of thumb, Closing Costs run 4 to 6 percent of the loan amount in the Baltimore Washington Area, so if you’re using an FHA-backed loan, your closing costs will probably be higher than your Down Payment.
So, if you are obtaining a loan for $175,000 and you qualify for an FHA 3.5% Down Payment loan, you will be required to pay $6,125 for a Down Payment and perhaps even much more for Closing Costs. Did anyone tell you it may cost you $17,500 IN CASH to buy a house?
The truth is, many first-time Home Buyers spend years saving up to pay for the down payment while closing costs come as a complete surprise.
What are Closing Costs?
When you pay Closing Costs you’re basically paying for the majority of the services you received during the transaction. The Seller, pays for services as well, such as for the real estate broker’s services. In fact, who pays for what at closing varies widely across the country but some items are standard.
Some of the more common fees that Home Buyers pay include:
- Credit Report
- Appraisal
- Down Payment
- Escrow Impounds (money kept in escrow to pay for your homeowner’s insurance and real estate property taxes)
- Prepaid Interest
- FHA Up-Front Mortgage Insurance Premium (MIP)
- Private Mortgage Insurance Premium for Conventional Loans
- Home Inspection (if not paid at the time of service)
- Termite Report (if not paid at the time of service)
- Loan Origination Fee
- Points, or loan discount fees, if you’ve decided to purchase them
- Loan Processing
- Loan Underwriting
- Title Insurance
- Notary fees
- Deed Transfer Taxes
- Recording the Deed
Lender Disclosure Requirements When It Comes to Closing Costs
By law, Lenders must disclose an estimate of loan costs within three days of the submission of a completed loan application. Then, three days before closing, the Title Company supplies the borrower with a Closing Disclosure (CD). While the fees listed on the Lender’s Loan Estimate may increase or decrease before closing, the Closing Disclosure is the final word.
It’s important to compare the two documents and look for changes. If you have any questions or concerns, call your Lender and/or Title Company immediately.
How to Pay Less at Closing
Many Sellers are amenable to paying a portion of the Buyer’s Closing Costs If you’re cash-crunched, let your Real Estate Agent know so s/he can negotiate Closing Costs on your behalf. (As your Real Estate Agent, I will help you to negotiate Closing Costs or Seller Help as a part of the Purchase Contract.)
If you’re purchasing a home using a Veteran’s Administration (VA) mortgage, there are certain closing costs that you are not allowed to pay. Some of these include:
- Attorney fee
- Document
- Escrow
- Processing
- Tax Service
- Underwriting
The maximum amount that a Seller can pay for your Closing Costs is typically capped by the type of Mortgage that you are getting. The amount varies per program with the maximum amount being about 6%. In addition to the Seller helping you pay your Closing Costs, your Lender may also offer a Lender Credit to help pay for them.
The Consumer Financial Protection Bureau’s website has lots of helpful information about the closing process, including a copy of the Closing Disclosure Form and an explanation of how to compare it to the estimate and a closing checklist.
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