| What are Closing Costs? |
Closing Costs are fees charged by the lender and third-party service providers to legally document, secure and financially close on your home - paying them is the last thing you have to do before you get the keys. |
| How will I know what my closing costs are? |
You will become aware of the extent of your closing costs through two regulatory required disclosure forms: the Good Faith Estimate (GFE) and the HUD-1 forms: - The GFE must be provided to you by the lender within 3 days of completing you mortgage application and will provide you with a summary of the material terms of your mortgage as well as an estimate of all of your closing costs in a three page document. From this point on, certain costs are fixed and are not legally allowed to change, while certain other costs may vary prior to your definitive closing (settlement date). The official GFE form can be seen here:
http://www.hud.gov/offices/hsg/ramh/res/gfestimate.pdf. - Fixed amounts (these amounts are not legally allowed to change):
- Origination charge
- Points charge / credit
- Transfer taxes
- Amounts that can increase up to 10%:
- Origination charge
- Points charge / credit
- Amounts subject to change at settlement:
- GFE lines # 4, 5 and 6: only if these items have been selected by the borrower
- Escrow and pre-paid amounts will vary depending on the timing of the closing
- The HUD-1 form must be provided to you within 36 hours of the agreed upon closing date of your home purchase. This form will provide a detailed break-down of all closing costs that you will incur, and the exact amount that you write onto your checks on closing day should match what you see on this form. The official HUD-1 form can be found here:
http://portal.hud.gov/hudportal/documents/huddoc?id=1.pdf.
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| What are Origination Charges / Fees? |
These are fees assessed directly by your lender to account for the costs of creating a new mortgage. Origination Charge is the fee assessed by your lender associated with the actual processing and creation of your mortgage. This typically includes things such as service fees, application fees and administrative charges but will often be presented as a single line-item. If you are receiving a “no-fee” mortgage, this should be $0. Point Credit / Charge is the dollar amount of money that you are (i) paying to your lender to decrease your interest rate to the specified amount (charge), or (ii) the credit that your lender is providing to you in exchange for taking a higher interest rate (this often takes the form of a lender waiving origination charges or other closing cost fees in exchange for the borrower paying a higher interest rate). |
| What are FHA Fees? |
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| What other closing costs and fees will I have to pay? |
Home inspection (pest, etc.)
Required by lender to ensure that a house is free of any major structural or other deficiencies, including pests, which could damage the value of the home. Appraisal Fee
Required by lender to ensure that the value of the home exceeds the value of the mortgage. Credit Report Fee Postage/courier Flood certification
Document that certifies the property’s status within flood zones as determined by the Federal Emergency Management Agency (FEMA). Survey
Determines exact boundaries of the property to which the lender will have a claim in the event of default. Title search and lender's title insurance
Cost associated with title company’s search of legal records to determine whether liens exist against the house’s title and the provision of title insurance for the amount of the mortgage for the benefit of the lender. Owner's Title Insurance
Title insurance for the amount of the home value for the benefit of the owner. Attorney, closing or settlement
Legal fees accrued by attorney reviewing documents and agreements as well as escrow fees. Recording Fee
Fee assessed by local governments (usually either municipality or county) to enter your mortgage and title of the deed in your name into official records. This fee is usually assessed based on the length of the document in addition to a base processing fee. Transfer Taxes (mortgage and deed)
Mortgage tax is a tax assessed on the value of any newly created mortgage. - Transfer tax is a tax assessed on the transfer of the deed or title to a property based on the home value.
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| What are Escrow and Pre-Paid Expenses? |
Escrow and Pre-Paid expenses are certain costs that you must either pay up-front, or make a provision for continued payment through the deposit of cash in an escrow account with the lender. The payment of these expenses upon closing on a mortgage has the effect of decreasing certain of your required payments in the future, but represents the actual cash amount that must be presented to close the transaction. Daily Interest Charges
This charge is the amount of interest that will accrue on your mortgage between the settlement date and the beginning of the first full month of your mortgage. Homeowner's Insurance
To protect the lender in the case of damage to the house, you will be required to provide up-front payment for the first full year of homeowner’s insurance. Property Taxes
Calculation of the amount of property taxes that will accrue between the settlement date and the first due date of your property taxes. |
| Who typically pays for closing costs? |
Typically buyers will pay the majority of closing costs, although negotiations with the seller or lender can lead to a decrease in the amount of cash closing costs that must be paid on settlement day. Seller financing (described below) can be used by increasing the mortgage amount, with the difference going to the seller. The seller will then pay closing costs out of their proceeds, thereby decreasing the closing costs for which you must pay. Lenders will also sometimes offer "concessions" which provide cash directly to closing service providers in exchange for a higher interest rate, known as "premium pricing". |
| How does seller financing of closing costs work? |
Seller financing is the result of negotiations between the buyer and seller and the specifics will need to be included in your purchase contract and disclosed to your lender. Generally, seller financing is achieved through the buyer increasing the purchase price (by increasing the mortgage amount) sufficiently to provide the seller with additional proceeds to pay for the closing costs in cash. Seller financing will result in a higher mortgage amount and a corresponding increase in required monthly payments to your lender (your interest rate could potentially increase as well, depending on the specifics of your situation including LTV and DTI). |
| What are the limitations to financing closing costs? |
Generally, the financing of closing costs by sellers is limited to a certain percentage of the total home value. Lenders deem anything above these percentages to be “inducements”, and may make corresponding negative adjustments to the home value used for LTV calculations (lenders try to prevent buyers from adding large amounts of closing costs to a mortgage that may not reflect the true value of a home). You also must ensure that the appraised value of the home is still greater than the mortgage value, otherwise your lender will not provide you with a mortgage. Typical limits on maximum amount of seller financing as a percentage of the home value: - FHA: 6%
- Jumbo FHA: 6%
- Conforming:
- 3% if LTV is > 90%
- 6% if LTV is 76%-90%
- 9% if LTV is < 76%
- Jumbo Conforming:
- 3% if LTV is > 90%
- 6% if LTV is 76%-90%
- 9% if LTV is < 76%
- VA:
- 4% of origination fees and points
- 4% of all other Closing Costs, including VA funding fee
- Jumbo: 3%
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| How do lender concessions work? |
Subject to negotiation with the lender, a buyer can finance their closing costs by having the lender provide a “concession” (which takes the form of a “credit” against origination charges on your GFE) in exchange for the agreement to pay a higher interest rate. This can also be referred to as “premium pricing”. The amount of credit that you receive and the premium pricing that a lender will charge is dependent on a wide variety of factors specific to your financial profile and the lender’s lending standards – you will have to discuss this with your loan officer. |
| What is Title Insurance? |
Title Insurance protects you from potentially losing your house and your down payment if a pre-existing claim or lien is discovered. Title disputes can arise from the unlawful transfer of the property in prior transactions or the existence of liens against the property. Title insurance certifies that the property you are buying was not found to have any pre-existing claims or liens (it has a “clean title”) and the title insurance company agrees to fully compensate the new title holder if a legitimate claim surfaces that ultimately results in forfeiture of the property. Title insurance generally consists of lender’s title insurance (to protect the lender) and owner’s title insurance (to protect the homeowner). |
| Do I need Title Insurance? |
In general, only lender’s title insurance will be required in order to ensure that the lender’s investment is secure. While you may not be required to purchase owner’s insurance, it is highly recommended that you choose to accept this cheap protection for two reasons: - Peace of Mind: It is likely that your home purchase will be the biggest investment that you ever make in your life. Should a legitimate claim arise against the title to your new home, title insurance can often be the only thing that prevents the total loss of the home. The vast majority of home owners purchase owner’s title insurance to make sure that they can sleep at night, comfortable knowing that an unforeseen claim will not spell financial calamity.
- Cost: Owner’s title insurance is one of the cheapest forms of protection that you can obtain on one of your largest investments. At issuance, as the title insurance company has already performed a full search and review of the title for the lender, rates for owner’s title insurance are far below what will ever be available should you decide later to acquire insurance. With the simultaneous issue of both lender and owner’s policies, you will achieve substantial cost savings – often nearly 50% off the cost of separately acquiring each policy.
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| Who pays for Title Insurance? |
While there are no laws dictating whether the buyer or seller pays for title insurance costs, there are some general conventions that are followed which dictate the party responsible for different costs: - Lender's Title Insurance: Buyer will pay for this cost (as it is directly related to the provision of a mortgage for purchasing the property) in all states except for Mississippi (sometimes negotiable, but usually paid by buyer) and Nebraska (usually split equally).
- Owner’s Title Insurance: This cost is more likely to be paid either by the seller or split by both parties. The reason for this is that there is the expectation that the seller is providing a property with a clean title, and thus should be responsible for the costs to ensure that this is the case. Again, these are only customs and can vary given the specifics of any individual transaction. Additional information can be found here: http://www.stewart.com/docs/2-2009-NTS-0912-05-8_StateLaws&CustomsBroch.pdf
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| How do I save money on Closing Costs? |
- There are a wide range of options you can pursue to help you save money on closing costs. You can save anywhere form a few hundred dollars up to thousands of dollars, depending on your individual circumstances:
- Shop around for 3rd-party services
- Certain services necessary to complete the settlement of your home purchase are eligible to be selected by you, the borrower. These include, but are not limited to:
- Home inspection (pest, etc.)
- Survey
- Attorney, closing and settlement fees
- Title insurance
- If a lender gives you the opportunity to shop for services (all services listed on lines 4, 5 and 6 on a GFE), you should take them up on the offer. Costs for these services can vary widely, and this is one of your best opportunities to save money. Lenders have no incentive to find you the best deals on these services, and a few simple phone calls from you can potentially save hundreds of dollars.
- Ask lender to waive fees
- In certain circumstances, your lender may agree to waive origination fees or provide a credit for closing costs without altering the terms of your mortgage. Depending on the specifics of your credit profile and how hot the market is, a lender may be willing to make you a deal.
- A lender will be most likely to waive their origination fees (which include “junk” fees such as processing fees, underwriting fees and application costs), but can also offer you a credit to cover the cost of 3rd-party fees.
- You will not always be able to negotiate a deal like this, but it doesn’t hurt to ask.
- Ask seller to pay costs
- The payment of any and all closing costs should always be a point of negotiation between buyer and seller. Depending on market conditions and the seller’s motivation to close a transaction, you may be able to extract meaningful concessions.
- Close towards the end of the month to avoid pre-paid interest charges
- This is one of the easiest ways to save on the amount of cash that you have to pay on closing day. Your lender will always assess pre-paid interest charges to cover the amount of time between the settlement date and the end of the month. The rationale for this is to compensate the lender for the portion of time you own the home between settlement date and the end of the month, and allow for your first payment the following month to be a “full” interest and principal payment.
- This pre-paid interest charge can be substantial, depending on the timing of your settlement. Planning ahead and scheduling your closing close to the end of the month can significantly reduce your cash to close.
- Get quotes from multiple lenders
- Many lenders will have similar lending terms (interest rate and payment provisions), but can compete by offering lower closing costs. You should try to get quotes from multiple lenders to determine if there are less costly loan options available.
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