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Understanding Closing Costs
There are five primary categories of closing costs:
- Lender fees
- Title Attorney costs, including title insurance
- Transfer taxes to local government
- Real Estate Agent Commission/Fee
- Upfront deposits for escrows and prepaids
In addition to the main categories, there are going to be miscellaneous costs which vary by transaction. For instance if you are buying a house, you may get a survey of the property which provides a boundary drawing. Or if you purchase a condominium, there may be fees assessed by the association or management company for the condo. These are just a few common examples.
Let’s break down the five main categories:
- Lender fees
The lender fees cover the costs for the processing of your application and the appraisal of your property. You’ll receive a copy of the appraisal when it comes in, and the purpose of the appraisal is to validate the value of your home. The processing costs go to cover the cost of evaluating your loan application and covers items like your credit report, verification of employment and taxes, fraud reports, staffing, among many other things. On a conventional loan our fees are $1985, broken down by $995 processing, $895 underwriting, $95 application. The flood certification fee is $17 (to check if the property is in a special hazardous flood area). The credit report is $51.41 or $99.64 for a joint credit report. An appraisal is additional and is typically $575-$625 but can be as high as $775-$900.
- Title Attorney Costs
The title attorney is responsible for managing the transfer of ownership from the seller to the buyer, handling the funds in the transaction, and issuing title insurance. The title attorney works with the courthouse to record your transaction and pays all parties. They research the title history of the property to confirm there are no liens which will transfer to the new owner, and that all past transfers of ownership occurred properly. Just in case there is an issue down they road, they issue title insurance which protects you and us as the lender in the case of any hidden liens or title defects. There are two title insurance policies, the owner’s title insurance and lender’s title insurance.
- Transfer Taxes (State/City/County)
Transfer and recordation taxes are essentially a sales tax on a home. They are required on a purchase transaction and sometimes required on a refinance as well. The local government will charge transfer tax based on the sales price and/or mortgage amount, and will also charge a fee to record the deed and deed of trust.
- Upfront escrow prepaid deposits
While these funds due at settlement are not “closing costs,” the upfront deposits are going to be due at the time of purchase as well. These go to cover the funding of the new escrow account, interest for the month of settlement, and if you are buying a condo it’ll cover the first 1-2 months of condo fees. Learn more about escrow accounts here.
- Real Estate Agent Commission / Admin Fee
Your real estate agent will inform you what their commission and fees are and that’ll be disclosed to you on your buyer agency agreement with them. Commission will be a percentage of the sales price and an administrative fee would be a flat fee to your real estate agent’s broker.
- Property / Miscellaneous costs
If you are buying a house (not a condominium or co-op) then there may be a property survey ordered by the title company which gives a boundary drawing of property lines. This cost is ~$250-$425. If you are buying a condominium or co-op or a property in a homeowners association, you may expect there to be various fees from the management company or association to provide documents, to transfer records, for a move-in fee, etc. These fees are difficult to know what they are upfront; they should hopefully be disclosed to you when you review the condominium, co-op, or homeowners association documents provided to you by the seller.
Mitigating closing costs
Should you not have the funds to cover the closing costs on top of your down payment, you can discuss with your agent the idea of negotiating a credit from the seller. Most loan programs will cap the maximum amount of credit at 3-6% of the sales price. Learn more https://alexjaffe.com/seller-credits
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