What's in this article?
First-time homebuyers have a lot to juggle. From house hunting to getting approved for a mortgage, the process is exciting and overwhelming. And as far as costs, the main focus often is on mortgage rates and down payments.
You’ve probably heard of closing costs, but many don’t fully understand all that these costs entail. Closing costs aren’t sneaky hidden fees, but rather a culmination of all the people and work that went into your home-buying process.
Understanding where these fees come from will help you feel more prepared. Discover where these costs come from, how they are calculated, and how to navigate those final few steps before you can walk into your new home.
What are closing costs?
A lot of work goes into the homebuying process, for a lot of different people. There are people handling the credit checks, inspections, applications, and all the paperwork that was created and completed. You also will have some prepaid costs, such as property taxes and homeowners insurance.
The culmination of this hard work and other expenses are the closing costs. Closing costs are paid at closing — when the property title is transferred from seller to buyer. Buyers usually pay between 2% to 5% of the purchase price for closing costs. Sellers also will have to pay some fees, but most of the costs must be paid by the buyer.
First time closing costs will not be a scary surprise — your mortgage loan officer is required to outline these costs in the Loan Estimate, which you receive when you first apply for a loan. They also will be outlined in the Closing Disclosure you receive a few days before closing.
That’s why it’s important to thoroughly read all documents you receive from your loan officer, and to not be afraid to ask them questions about parts you don’t understand.
What is included in first time closing costs?
Closing costs include fees from your loan officer, home inspectors, and appraisers, plus taxes and insurance.
The following are some of the fees you can expect to see at closing.
These fees are for processing your mortgage application. This includes your credit checks and any administrative expenses.
These fees cover the appraiser, who will evaluate the home you want to purchase to ensure the value equals the amount you want to borrow.
An inspector must evaluate if the building is in good shape and safe to live in.
If a real estate attorney is required in your state, they must be present at closing. The fees for this attorney depend on the number of hours they worked for you.
The buyer must pay the interest on the mortgage that accrues between the settlement date and the first monthly payment due date.
Loan origination fee
Also known as an underwriting fee or processing fee, this fee is for preparing and evaluating your mortgage loan.
Mortgage insurance application fee
If your down payment is less than 20%, you might be required to get private mortgage insurance (PMI).
Title search and insurance
Title searches ensure the person selling the house actually owns it. Title insurance is a one-time fee that’s paid to the title company as protection in case of an ownership dispute that wasn’t found during the title search.
FHA or VA fees
Federal Housing Administration (FHA) loans require an up-front mortgage insurance premium, and VA loans require fees that help offset the loan program’s costs to taxpayers.
Property taxes and home insurance
At closing, buyers usually must pay any property taxes due within 60 days, and prepay the first year’s insurance premium.
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How are closing costs calculated?
Closing costs mainly depend on your home’s purchase price and the location. Fees such as the appraisal and home inspection are more straightforward based on what the appraiser or inspector charges, while the rest usually are either a percentage of the loan amount, are hourly fees, or vary depending on your lender.
Some states also require additional inspections. While you will know your closing costs in advance when you receive your Loan Estimate, be sure to work closely with a trusted mortgage loan officer who can help you explain where these costs are coming from, and what the expectations are for closing day.
Since some new homebuyers don’t factor closing costs into the final costs, they may not have properly budgeted. Working with a loan officer will help you stay on track and financially prepared.
Are closing costs negotiable?
You may be able to negotiate with the seller on some of the closing costs. Sellers also are responsible for their own closing costs, including a property or deed transfer tax, real estate commissions, and title insurance.
Some sellers may negotiate if you’re willing to pay the sale price, or if the home has been on the market for a long time and the seller is eager to move forward.
Navigating the home-buying process
Three days after applying for a loan, you will receive a Loan Estimate detailing all fees and costs required to close. Then, three days before you close, you will receive a Closing Disclosure. This serves as confirmation of the Loan Estimate, with any minor adjustments.
The Closing Disclosure will include all costs listed in detail, including a breakdown of how much cash you need at closing.
Throughout the entire process, your loan officer is there to support you and answer any questions you might have. The homebuying process for a first-time buyer can be overwhelming and confusing, which is why it’s important to have an honest, respectful, trustworthy loan officer to assist you.Let the professionals at Homefinity guide you through the homebuying process, with as little or as much assistance as you’d like. Reach out to us today to get started.