What are buyer closing costs and how much are they?

Summary:  Closing costs are all the fees that a buyer is responsible for paying when buying a home and can range anywhere from 1% to 4% depending on the loan program selected.  Fees are higher for FHA loans. These fees DO NOT include the down payment.

Closing costs are broken down into the following:

Loan Fees

  • Appraisal – this ranges from $350 to $550.
  • Origination Fee – This is how much the bank charges the borrower to create the loan.  It fluctuates depending on the loan selected and the interest rate given to the client.  1% is typical.
  • Processing – This fee is charged by the loan company to process the loan. This ranges from $395 to $800.
  • Underwriting – This fee is charged by the loan company to get the full loan approval.
  • Mortgage Insurance Premium (FHA Loans) – MIP is 2.25% of the loan balance starting April 5, 2010. On a $400,000 loan that equals $9,000.  This can be added to the loan balance and is not always required to be paid up front by the borrower.
  • Miscellaneous – there are other fees for additional paperwork, courier services, notary fees, etc.. that vary widely from loan to loan.

Settlement Fees

  • Escrow Fees – Both the buyer and seller pay for their own fees in a typical transaction in CA.  On a $500,000 purchase this can be up to $2,000 for the buyer.  Included in these fees are charges for preparing various documents such as loan docs or HOA docs, plus courier fees, notary fees, etc…  Each escrow company has different fees and these fees are broken down for a borrower by the escrow company
  • Title Policy – The buyer will be required to buy a Title Policy to cover their lender.  This fee is typically two-tenths of one percent (0.002) of the loan amount and covers any additional fees associated with this policy.

Pre-paid Property Taxes

All property taxes in California are paid in advance twice a year.  They are due every December and April.  The pre-paid amount will be determined based on the current tax bill and when you close.  For example, if the annual property tax on a property is $4,800 ($2,400 every 6 months) and you close escrow in December, you will have to pay $2,400.  For a more detailed explanation of Pre-paid property taxes please see this article: http://aaronzapatablog.com/2010/01/05/understanding-pre-paid-property-taxes-when-purchasing-a-home/

Inspection Fees

 A borrower is responsible to conduct all inspections of a subject property.  The most common inspection is the Home Inspection which runs approximately $350.  Other inspections, i.e. Mold Inspection, can be done and the fees vary.

Realtor Commissions

Buyers do not pay the agent commissions unless they have a specific agreement to do so.  Usually the seller pays the agents on all residential real estate transactions.

How does a buyer pay for these costs?

There are a few options when it comes to paying for these costs. First, a bank will lower their origination fee if the borrower takes a slightly higher interest rate.  The borrower can also ask the seller to pay for some or all of these fees.  Second, the buyer can request that the seller pay 1% to 3% of the sales price toward their closing costs, depending on the needs of the buyer.  The seller would then pay for the costs out of their net proceeds through escrow.  If the property is a short sale the banks rarely grant this request.

If the buyer does not ask for a credit and wants the best interest rate then they are going to pay for all of these costs.  Remember, these fees do not include the down payment.

Example

Home Purchase Price: $500,000
Down Payment: $25,000
Loan Amount: $475,000 (FHA Loan because it’s less than 10% down)
Current Property Tax Bill: $4,000 per year
Closing Date: June 10

Loan Fees:  $16,938

  • Origination: $4,750
  • MIP: $10,688
  • Other: $1,500

Escrow Fees:  $1,700

Title Policy Fee: $950 ($475,000 x .002)

Inspection: $350

Total Closing Costs: $19,938

Pre-Paid Property Taxes:  $ 1,333 ($333.33 x 4 months)

Total Cash Needed Including Down payment: $46,271

Remember that the MIP charge can be financed into the loan. 

Disclaimer (Fine Print)

Every transaction is different and fees may vary widely depending on specific circumstances.  A buyer should always verify fees with the necessary parties.  All examples given here are estimates or approximations and do not reflect any actual circumstance.  Nothing in this blog post should be taken as a recommendation or legal advice.


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