Breaking Down Closing Costs for First-Time Homeowners

First-time homebuyers sometimes assume that once their offer is accepted, the hard part is over.  As a result, closing costs often catch them off guard. Knowing what to expect can reduce stress and help your closing day go off without a hitch.

What are closing costs?

Closing costs are collection fees paid when finalizing a mortgage loan and transferring ownership of a home. They typically range from 2% to 6% of the home’s purchase price. So, on a $300,000 home, your closings cost would be between $6,000 and $18,000.

What do closing costs pay for?

Closing costs cover a range of expenses, which can vary depending on your location and loan type. Below are a few examples of closing costs you may have to pay.

• Loan-related charges

Lenders charge fees to cover processing your application, evaluating your finances during underwriting, and preparing your loan for closing. You might also be charged an origination fee to cover the cost of processing your loan.

• Appraisal and inspection services 

Assessing the home’s condition and market value is essential to making sure the selling price is reasonable and your mortgage is appropriate. 

• Title search and title insurance 

Your lender will likely conduct a title search to ensure the seller has the legal right to transfer ownership. Title insurance protects the lender if problems do show up after the sale.

• Government recording and transfer charges

Local governments, usually at the county level, are responsible for recording property transactions. This process ensures ownership is legally documented and searchable for future reference. Additionally, some states charge a tax for transferring property.

• Escrow and prepaid expenses

Escrow is a temporary account that holds funds, assets, and paperwork until certain conditions are met. In some cases, your lender might also set up an escrow account to hold funds for property taxes and homeowners insurance. The escrow fee covers the cost of managing that process.

• Optional extras 

One of the more common optional closing costs is discount points, also called mortgage points. Buying points lowers your interest rate. Other optional costs could include an owner’s title insurance policy or a home warranty, depending on your location and preferences.

Who pays closing costs?

Buyers usually pay most closing costs, but some can be the seller’s responsibility. For example, sellers might cover transfer taxes or title insurance in some states. But the rest fall to you as the homebuyer—unless you can negotiate seller concessions when you go into contract. This is when the seller agrees to take on some additional closing costs to help get the deal done. 

Some loan programs have unique fees or limits on how much a seller can contribute. FHA and USDA loans, for instance, cap seller concessions at 6% of the home’s purchase price or appraisal value. VA loans allow only 4% of the home’s purchase price.

How to prepare for closing costs

Taking practical steps to budget for closing costs can help make your closing day go smoothly. Here’s a checklist to guide you:

• Estimate 2–6% of your home’s purchase price. This rough range can help you plan for the total amount you may owe at closing.
• Get a loan estimate from your lender. A loan estimate outlines your estimated interest rate, monthly payment, and closing costs for your loan. Your lender must send it within three business days of receiving your loan application.
• Shop for third-party services when allowed. You may be able to choose providers, like a home inspector, title company, or insurance carrier. Comparing quotes can help reduce costs.
• Ask about seller concessions. Your real estate agent can help you decide if asking the seller to cover some of your closing costs makes sense.
• Review your closing disclosure. Your lender will send this document at least three business days before closing. It shows your final loan terms and closing cost, so compare it to your loan estimate.
• Confirm payment instructions to avoid fraud or delays. Wire fraud is a growing threat in real estate. Always call your title or escrow company directly using a verified number to confirm where and how to send your payment.
• Initiate payments ahead of your closing date. Most closings don’t accept personal checks, and wire transfers and certified checks may take a day or two to process, so start early to avoid delays.

Plan ahead and close with confidence

Closing costs can feel overwhelming – especially if they throw your finances for a loop. But if you budget for them from day one, and work closely with your lender, real estate agent, and title company, you can come to closing day ready to sign on the dotted line.

Sources

https://www.usbank.com/home-loans/mortgage/first-time-home-buyers/closing-costs.html

https://www.experian.com/blogs/ask-experian/what-are-closing-costs-for-home-seller/ 

https://www.nar.realtor/closing/seller-concession 

https://www.consumerfinance.gov/ask-cfpb/what-is-a-loan-estimate-en-1995/ 

https://www.consumerfinance.gov/ask-cfpb/what-is-a-closing-disclosure-en-1983/