Purchasing a house can include a myriad of costs for which one must be prepared. These costs are typically assessed in the form of fees that are paid when the real estate transaction is closed, meaning when the title or deed is transferred to the buyer. While there are closing costs that typically need to be paid by both the seller and the buyer, this article will focus on those to be incurred by the buyer. Read on to see what it costs to close on a house.
Closing Costs are Variable
First, it’s important to note that many of the costs associated with closing on a house can vary to a significant degree based on where the house is located. Other things that can affect the cost of closing on a house can be the type of property you are purchasing and the type of loan you are using to finance your new home.
Since so many variables go into determining the closing costs on a house, it is difficult to predict exactly which costs you will be responsible for without knowing the specifics of your transaction. The following information will give you a good overview of the many different costs that can be assessed on the purchase of a house. From that list, you’ll be able to see which costs apply to your specific situation. Almost certainly you will not be required to pay all of the following costs, but a good deal of them could be relevant to your house purchase.
Title & Insurance Costs
Owner’s Policy Title Insurance
This is typically an optional cost that serves to protect you in case someone challenges the validity of your claim to ownership of the house.
Closing or Escrow Fee
This is a fee that is paid to the escrow company, title company, or attorney for conducting the actual closing of the sale. Whether it’s a company or attorney performing the service, their role is to oversee the closing as a third party that is independent of the sale. In some states it is required that a real estate attorney be present at this stage of the process.
It is common practice for the buyer to be required to put down a deposit to cover property tax and payments on mortgage insurance at the time of closing. Typically, the deposit will cover two months of property tax. This is not always required but is a standard practice.
This is a tax that is required to be paid when a title passes from one party to another.
At the time of closing, It is standard practice for a lender to require of you any payments for property taxes that will be due within sixty days of the purchase.
Private Mortgage Insurance
It is possible to secure a mortgage by making a down payment that is less than 20% of the house’s purchase price. If you are doing this, your lender will most likely require you to pay private mortgage insurance. The lender may also require you to pay the first month of this cost when you close on the house
Loan Discount Points
This is a payment that lowers the monthly payment for the length of your mortgage. The higher you pay on this front-end payment, the lower your monthly requirement will be.
Lender’s Policy Title Insurance
This is a form of insurance required by your lender which will assure them that you do in fact own the house and that the lender’s mortgage is a valid lien. It also serves to protect the lender if there is some sort of problem with the title.
Home Owners Association Transfer Fees
Strictly speaking, this is not a cost the buyer incurs when purchasing a house as it is almost always the seller’s responsibility to pay these transfer fees. It is, however, wise to be aware of this process because the buyer should review the documents associated with this transfer to ensure there are no residual fees or other concerns for which the buyer will be responsible when taking ownership of the house.
FHA Up-Front Mortgage Insurance Premium
This cost only applies to those who have an FHA loan. This premium, often just known as UPMIP, is equal to 1.74% of the base amount of your loan. This cost can be combined with the cost of the loan depending on the preference of the buyer.
This is the insurance that will need to be purchased to cover the possibility of damage to your new house. It is standard practice to pay for your first year of insurance at the time of closing, so it makes sense to consider this along with other closing costs.
Service & Attorney Fees
In many states, an attorney is required to review any documents associated with the closing. This can be done on behalf of either the buyer or the lender. Although not required in all states, if it is required where you are purchasing your house, or you elect to have the review done outside of requirement, you will need to pay a fee to the reviewing attorney.
Separate from a possible appraisal done by the lender, an appraisal company will need to assess the house’s value. This is done to confirm the actual market value of the house. The appraiser will need to be paid for this service.
This cost is paid to the lender to cover research done when deciding whether to approve you for a mortgage.
It is standard practice for a lender to require you to prepay any interest on your loan that will accrue between the time you close on your house and the time you are required to make your first mortgage payment. While this practice is extremely common, it is not universal.
Often time documents must be rapidly transported to and from the various parties involved in a closing, especially when they are related to a loan. Typically, this is done through the use of a fast and reliable courier service that must then be paid for their time and effort.
Inspections & Appraisals
This is an optional (but recommended) cost that is usually done by the buyer to ensure the condition of the house is commensurate with how the seller is presenting it. A good home inspection will alert you ahead of time to possible repairs that will need to be performed on the house.
This cost is to cover an inspection for dry rot and termites. While it is not required in all states, it is a necessary step for government loans. Required or not, it is a generally recommended practice as the costs associated with termite or dry rot repairs can be quite high. It’s important to go into a new home purchase with the best possible idea of the house’s condition.
This is a cost paid to an independent party who will determine if the property is located in a zone susceptible to flooding. If this is found to be the case, flood insurance will be required. This payment is solely for the cost of the determination and does not cover the cost of flood insurance, should it be required.
Lead-Based Paint Inspection
Since many old homes have lead paint hiding somewhere in the walls, an inspection is done to evaluate the health risks from the paint. This is a cost to cover that inspection.
Application fees are a very common fee that is required to process an application for a loan. To process your application, prospective lenders need to employ a variety of services that can incur a cost on their end. This cost is typically passed on to the loan applicant by way of an application fee. Examples of some of the services a lender might use to process your loan application include a check of your credit score or an appraisal of the house for sale. While application fees are widespread, some lenders will opt to not charge them as added incentive to secure your business. For that reason, you may be able to negotiate this fee down or you may even be able to have the fee eliminated altogether.
This is a fee assessed by the lender to cover their administration costs. The amount varies between lenders, but it typically amounts to around one percent of the total loan. It is possible to find home loans that waive the origination fee, and this can potentially be a point of negotiation between yourself and your lender.
This is a fee usually charged by the city or county in which you reside. The fee covers the cost of recording the transaction for public records.
This is a cost typically paid to a survey company that will ensure that all stated property lines are accurate. This is sometimes not required, depending on the state in which the house resides, but it is still a service worth considering to make sure you have an accurate idea of what you are purchasing.
VA Funding Fee
This is a cost that only applies if you have a VA loan. If so, a funding fee is sometimes required at the time of closing. This is typically some percentage of the loan and is used by the VA to fund their home loan program. The percentage amount changes depending on your service and loan size. Similarly, it is possible that you may be exempt from this cost altogether.
This cost is paid to the title company for the performance of a property record search. This search is done to verify that no other parties have a claim to the property that you are purchasing.
This information is provided courtesy of The Eastside Real Estate Team. Keep us in mind for all your real estate needs. Call us today at 425-200-4093.