What’s the Deal with Closing Costs?
Whenever you speak with someone that is looking to buy a home, you often hear them talk about their down payment, the interest on the loan, but you also probably hear them talk about closing costs. If you’re looking to buy your first home or have never purchased a home, you may not be sure what closing costs are, what they cover, and how much they can cost.
Here’s what you need to know about closing costs when it comes to buying (or refinancing) a home.
What are Closing Costs?
Plain and simple, closing costs are fees that are charged by the lender for services that must be performed to close the loan on the home. This cost is in addition to the down payment and the loan itself.
What do Closing Costs Include?
A common misconception by many is that closing costs are kept by the lender. While the fees are assessed by the lender, the fees are typically passed on from third-party vendors that perform several services required during the purchase of a home. These services include, but are not limited to:
Credit Report – When you apply for a loan, you are required to have a credit check to verify that you can pay the loan back. Lenders will review your credit report to determine the level of risk in lending you the money you need to purchase the home. Credit reports are typically pulled from credit reporting agencies like Equifax, Experian and/or TransUnion.
Appraisals – Lenders require a property appraisal for the home you wish to purchase put together by an appraiser. This is used to determine and verify the fair market value of the home. The reason that lenders require this is to ensure that the loan they offer you is not greater than the value of the home itself.
Flood Determination – Property is zoned to determine whether it is located in a federally designated flood zone or not. Flood insurance is required if the home is determined to be in a designated flood zone.
Title Search – An outside title company is typically brought in to do a thorough search of property records on the home to ensure that there are no problems associated with your new ownership of the property. For example, they are looking to see if there are any liens against the home by reviewing prior deeds and court records.
Title Insurance – In conjunction with the title search, there are also two types of title insurance policies that are required during the purchase of the home. One is a Lender’s Policy and the other is an Owner’s Policy. Title insurance is important in case there is a situation where someone challenges ownership of the home or an undiscovered lien on the property resurfaces.
Homeowners Insurance – Like auto loans, homeowner’s insurance is required to cover potential damage to the home in the event of a fire or other event causing damage to the house. This policy covers the cost to repair any damage and potentially rebuild the home, if necessary. Most lenders include the first year’s insurance premium in the closing costs.
Attorneys’ Fees & Other Closing Fees – Some states require that an attorney be involved in the closing process, including the preparation and review of all the closing documents. The cost to have an attorney involved in the closing process is passed along with the closing costs in the purchase of the home.
Postage/Courier Service – There are fees associated with the delivery of important closing documentation during the closing process, which are often done by utilizing a courier service.
HOA Transfer Fees – If you’re moving to a home located in a community with a Homeowners Association, some HOA’s require that its homeowners pay a transfer fee between owners. This pays for the HOA to verify to the buyer that the seller is current on their dues and provide any additional documentation related to the HOA’s rules and by-laws.
How Much are Closing Costs?
Closing costs can vary depending on where you’re purchasing a home. It’s estimated that closing costs can be anywhere from 2% to 5% of the total cost of the home.
Are Closing Costs Negotiable?
Absolutely. Lenders are required to provide you, as the buyer, a Closing Disclosure Statement. This statement will show you a list of all the fees included in the closing costs. The buyer can check with the lender, but it is helpful for buyers to be aware of what services they can typically shop around.
SERVICES YOU CANNOT SHOP AROUND FOR:
Credit Report Fee
SERVICES YOU CAN SHOP AROUND FOR:
Attorneys’ Fees & Closing Fees
Lenders often work with affiliated vendors and, while it may be a convenient option for you to not have to shop around, it is helpful for you as a buyer to get multiple quotes and see what other options you have. Ask questions and determine what costs are necessary and which ones can be negotiated.
Additionally, many buyers have had success in negotiating down the purchase price of the home to cover any closing costs associated with the purchase of the home.
About Century 21 Peak
Century 21 Peak, a part of the Peak Corporate Network, is an expert in the real estate industry and provides a comprehensive set of services like asset management, escrow services, personal insurance, financing and more. Their network of independent but affiliated companies provides unparalleled services to homeowners, homebuyers, private investors, brokers, lenders, agents, and corporate clients.