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Closing costs are financial obligations to cover certain fees that are associated with real estate loans. When it comes to a home mortgage, there are several types of closing costs. We have compiled this list to help give you an idea of some common closing expenses. Please note that depending on your loan and location, there may be additional closing costs not illustrated in this post.
General types of closing costs and expenses associated with home loans:
- Attorney’s fees/escrow fees
- Property taxes
- Loan origination fee
- Recording fees
- Mortgage insurance premium
- Title insurance
- Loan discount points
- First payment to escrow account (to go toward future real estate taxes and insurance)
- Premium for homeowner’s insurance policy
- Underwriting fee
- Tax service fee
- Broker /Lender fee
- Appraisal Fee
Another expense that people incur is pre-paid interest. Per-deim interest is the amount of interest per day that the lender charges you for borrowing the money. At closing a lender will charge a certain number of days worth of pre-paid interest. For example, if you close on the 10th of June, you may need to pre-pay 20 days’ worth of interest (in a 30-day month). Then, on the first of the next month (July 1), you will be paying 31 days’ worth of interest. The purpose of pre-paid interest is so that you won’t have to pay a larger sum on your first mortgage payment. Without pre-paid interest in our example, you would have to pay for 51 days’ worth of interest (the 20 days in June + the 31 days in July).
Recording fees cover the costs associated with recording documents (mortgage agreement, deed, etc.) at the county clerk’s office. This task is often completed by the title company.
It can seem overwhelming when you look at a long list of possible closing costs, but don’t let it intimidate you. Federal law requires the lender to provide a ‘Good Faith Estimate’ within three days of the application, disclosing all reasonable fees associated with the loan. This prevents borrowers from experiencing unpleasant surprises when they are faced with their mortgage closing fees.
If you come across a fee that you are unfamiliar with, don’t be afraid to ask questions. Especially if you notice a big difference between the fees listed on your Good Faith Estimate and your final settlement (HUD-1) paper.
Understanding Seller Paid Closing Costs
In a strong buyer’s real estate market, where there are many more homes for sale than people shopping for property, sellers must do everything they can to make their listing stand out from the rest and present an attractive deal. Many offer to pay a prospective buyer’s closing costs, up to a certain percentage of the purchase price. This is particularly attractive to first time home buyers who may struggle to come up with the funds for both a down payment and closing costs (generally 3 to 6 percent of the loan amount.)
When considering seller paid closing costs there are a few things to understand:
The Limits of Your Mortgage Loan Program
Each home loan has specific guidelines that must be met in order for the loan application to be approved. Some will allow the seller to contribute towards closing costs up to a certain percentage of the loan amount, but others won’t. If you plan on using seller paid closing costs as part of your home financing talk to your mortgage loan officer about whether there is a loan program for your scenario that will allow it. Be sure that the seller does not pay more than the permitted percentage or it could jeopardize your loan approval.
It may come as a surprise, but some of the closing costs may be tax deductible even if paid by the seller. Be sure to consult your tax advisor for details.
Even if the seller of the home you’re interested in has not stated they will pay closings costs it is something you can request when making an offer. Talk to your real estate agent about writing this option into the offer to purchase. Taking advantage of seller paid closing costs can be an excellent way to pay a little less out of pocket when purchasing a home.
A Good Faith Estimate or GFE is an estimated approximation of the closing costs that you, as the buyer will be responsible for when the transaction is completed. Because of the Real Estate Settlement Act, your mortgage lender is required to provide you with information that is as accurate as possible. The GFE must be given to you no more than three days after you have submitted your loan application to the lender.
Understanding a Good Faith Estimate of Settlement Expenses
A Good Faith Estimate is considered a standard form that is used by potential home buyers to compare different quotes from different mortgage lenders. As the buyer, it is in your best interests to obtain at least two or more quotes from separate mortgage lenders. Be aware that closing, or settlement costs can vary from state to state and even county to county. That is why it is of vital importance that you thoroughly research the closing process and have an experienced real estate attorney make sure that everything is in order. As you obtain these quotes, ask for an explanation when there are large monetary differences in the itemized lists of closing costs.
When you buy a home, the closing costs include all of the expenses incurred during the sale of the home and implementation of the mortgage. Be aware that it is not uncommon for the closing costs to be as much as 5% of the home’s sale price. As a potential buyer, it is best to wait and see what the settlement costs are before signing any loan contracts.
There are a variety of expenses associated with the settlement costs, such as fees for a credit report, title insurance, document preparation, the survey, mortgage insurance application, attorney, city and county tax stamps, and underwriting (see the list at the top of this page). Please note that the previous example is not a complete list of closing cost items. Also there are charges that cannot change at closing, charges that can increase up to 10%, and charges that can change at the time of closing.
For a detailed explanation of closing cost fees, please visit www.hud.gov
Below is a video from a loan officer explaining closing costs and what you might find on a GFE. Please note that we are not affiliated with the person or company represented in the video. Be sure to consult with a licensed mortgage professional for more information.