How to Estimate Home Closing Costs for Any Loan
When purchasing a home, budgeting for closing costs is essential.
Average closing costs for buyers total between 3% and 6% of a loan amount. These costs include cash the buyer needs to bring to the closing table on top of the down payment. In this article, we’ll cover typical closing costs.
Why Do Buyers Need to Pay Closing Costs?
Closing costs are home purchase-related fees. During the process of creating your home loan, several professionals and companies provide services that allow your lender to approve the mortgage. These fees may include appraisals, mortgage underwriters, title searches, and more.
Specific closing costs vary based on location, property type, and loan type.
How Much Are Closing Costs?
With the average closing cost falling between 3% and 6% of a mortgage’s value, a buyer should prepare to bring several thousand dollars to the closing table. Someone purchasing a $300,000 home can expect to pay between $9,000 and $18,000 in closing costs.
Closing costs are separate from a down payment.
Are Closing Costs Only for the Buyer?
Both buyers and sellers should anticipate closing costs. However, the responsibility for covering closing costs falls more heavily on the buyer.
One way to reduce buyer closing costs is to ask a seller to cover partial closing costs during negotiation. In “hot” markets, buyers often have little wiggle room for getting sellers to cover closing costs. However, this may still be possible for a property that requires lots of work.
When a seller is motivated to get a home sold, they may agree to cover some closing costs as part of seller concessions.
Due to government regulations, sellers can’t pay all of the closing costs on behalf of the buyer – a rule in place to help avoid inflation in the housing market.
The amount a seller can legally contribute to a buyer’s portion of closing costs is determined by the loan-to-value ratio of the sale. It can range from 3% to 9% of the total value of the sale. If a buyer is using an FHA or USDA loan to buy a home, regulations cap seller contributions at 6%. For a VA loan, that dips to 4%.
Things get more complicated with a conventional mortgage. While buyers with down payments of 10% or less can only accept up to 3% of the purchase value from sellers, buyers putting down between 10% and 25% can accept up to 6%. There’s a 2% cap for investment properties regardless of the down payment.
A real estate agent can help a buyer determine if it’s smart to ask for seller concessions or negotiate a lower sale price.
How Are Closing Costs Calculated?
There’s no single formula for determining closing costs. Lender rules, government requirements, loan type, property location, buyer-seller negotiations, and other factors all determine the final tally.
However, a buyer should have a solid idea of how much they’ll need to bring to closing after receiving something called a closing disclosure from their lender. A closing disclosure is a document that lenders provide to buyers at least three business days before a scheduled closing meeting. The document itemizes all of the closing costs a buyer must cover.
What Is Included in Closing Costs
According to the National Association of Realtors®, these are the typical items included in closing costs:
- The down payment amount that your lender has agreed to accept. This can be as low as 3.5% for borrowers with FHA loans. Just keep in mind that a credit score of 580 is needed to qualify for a 3.5% down payment. All other FHA borrowers need to put down 10%.
- Loan origination fees cover the lender’s costs for processing and underwriting a loan. Most lenders charge around 1% of a loan’s value.
- Any points or loan discount fees that the buyer pays to receive better loan terms and a lower interest rate.
- Home inspection fees. While waiving home inspection is popular, it’s smart for buyers to retain the right to a home inspection. Some types of loans require inspections. For example, VA loans require pest inspections in many states. Home inspections cost up to $500.
- Appraisal fees. Lenders require appraisals to ensure that the amount you’re borrowing is reasonable based on the true value of a home. If the appraisal comes back too low, the buyer will need to walk away from the sale, convince the seller to lower the price, or come up with the cash difference between the selling price and appraisal amount. The appraisal fee ranges from $300 to $800.
- Credit report pulls. Fees for checking a borrower’s credit report range from $10 to $100 dollars.
- Private mortgage insurance premium (PMI). When putting down less than 20% on a home, buyers must pay for something called PMI that totals about 0.5% to 1.5% of the loan amount annually. In some cases, PMI can total several hundred dollars per month.
- Insurance escrow for homeowner insurance.
- Property tax escrow. In this case, the lender takes hold of money to cover taxes and insurance in an escrow account. The lender pays these costs on behalf of the buyer.
- Deed recording fees cover the expense of documenting a home sale with the local government. These are about $200 or less.
- Title insurance policy premiums range from 0.5% to 2% of the purchase price.
- Title search fees costing up to $400.
- Land survey fees ranging from $500 to $1,000.
- Notary fees.
In some cases, a buyer must pay prorated home costs already paid by the seller. An example would be annual property taxes.
If the seller has paid the full year of property taxes for a home, even though they are moving out before the year’s end, the buyer will take on a prorated share of the cost. This means that the buyer will pay tax fees to the seller based on the number of months left in the year starting on closing day. Prorations can also apply to utility bills, homeowner association (HOA) fees, condo fees, and more.
Attorney fees are also considered part of closing costs. A real estate attorney helps to ensure the proper legal transfer of a property from the seller to the buyer. While using an attorney is optional in some cases, state laws in Connecticut, Delaware, Georgia, Massachusetts, New York, North Carolina, South Carolina, and West Virginia require the use of a licensed real estate attorney to handle at least some parts of a property transaction.
If you’ve opted for a rate-lock fee, you’ll pay this at closing. Rate locks allow borrowers to lock in their interest rates during the time between preapproval and closing. Generally, a rate-lock fee can be up to 0.50% of the loan value. Always ask about a free rate lock when shopping for mortgages!
Can You Make Closing Costs Part of the Mortgage?
If average closing costs for buyers are making it hard to afford a home, it’s possible to roll closing fees into a home loan in some cases, depending on a lender’s rules.
The upside to rolling real estate closing costs into a mortgage is that the buyer can purchase a home even if they don’t have a lot of cash to close. The downside is that the buyer will pay more interest over time because the additional fees will make the mortgage larger.
Is There a Way to Reduce Home Closing Costs?
Most closing costs on a house are unavoidable. However, buyers do have some control.
The best way to reduce closing costs is to shop around with different lenders. Some lenders advertise competitive closing costs. What’s more, a lender offering a lower interest rate will help to offset some of the unmovable closing costs.
Of course, asking for seller concessions to reduce closing costs is another option. When taking this route, it’s important to do research to understand how much a seller can legally contribute based on the loan type. With that information in hand, the buyer can approach the seller with a request for concessions.
Just keep in mind that a seller is free to reject this request!
Final Thoughts on House Closing Costs
Closing costs are unavoidable. The good news is that most closing costs go toward fees and services that protect the buyer from making a bad decision.
When shopping for homes, add another 3% to 6% on top of the asking price to get a better idea of how much each home will cost once closing costs are factored into the mix.
Finally, don’t agree to close until the lender provides a legally required closing disclosure which is an estimate of how much cash you will need to close. They must give you this document at least three business days before a scheduled closing.
If the lender is being unresponsive about submitting this document, you can file a complaint with the Consumer Financial Protection Bureau (CFPB).