Closing Costs - What are they?

When purchasing a home it is important to know all the costs that go into it. We have discussed the difference between earnest money and a down payment. There are additional costs that come with purchasing a home like a home inspection, don't skip on this! One many people do not understand is the closing costs. What exactly are closing costs?

Closing costs are hard to pin down, but it is typically 2 - 5% of the purchase price of the home. If you look at a home that is $200,000, then the closing costs can be in the range of $4,000-$10,000! That is a huge range! Your lender is required to send you a loan estimate explaining your closing costs within three days of you submitting your loan application, but you don't want to be caught off guard on thousands of dollars in fees coming your way.

The reason why closing costs are so hard to determine is that they are a collection of different expenses that arise for different reasons. Some of which you can shop around for and others that you cannot. So what all is included in closing costs, here are just a few:

Application Fee: Some lenders charge an application fee to process your loan request. This fee varies by lenders so shop around!

Appraisal: Your lender will order an appraisal through a third-party appraisal company that will send an appraiser to take a look at your home to determine how much the property is worth. Appraisals are important because they set the amount that the lenders will let you borrow for a property. This ensures that you are not overpaying for a property.

Attorney Fees: In some states, SC is one of them, you can't close on a housing loan without an attorney. Attorney fees cover the cost of having real estate attorney coordinate your closing and to draft the paperwork for your title transfer.

Credit Report: This is the cost to the bank of purchasing your credit report from one of the credit reporting agencies.

Flood Certification: If your house is situated on or near a flood plain, your bank may want to document or confirm its status. This involves paying for a certification from the Federal Emergency Management Agency (FEMA).

Title services: The property's title is one of the most important documents in the entire home-buying process. This is the piece of paper that spells out who actually owns the home. Title service companies research the title to ensure that it's legitimate. Lenders require the borrower to buy an insurance policy to cover the lender in case the title is later found to be defective.

Postage or Courier: There is a lot of paperwork that is involved in the sale of the home. Your lender may hire a courier to transport the document quickly and securely.

Survey: This is an evaluation of your property to determine its boundaries as well as the location of fences, walls, gas lines, etc. This is required in some states, but not all.

Taxes and Government Fees: Government recording fees are charged by the local government for making a public record of the sale. Transfer taxes are also a part of the fees that the government charges on home sale deals.

Property Taxes & Mortgage Insurance: You are often asked to put down two months of property tax and mortgage insurance payments at closing.

FHA Up-Front Mortgage Insurance Premium (UPMIP): If you have an FHA loan, you'll be required to pay the UPMIP of 1.75% of the base loan amount.

Homeowner's Insurance: This covers possible damages to your home. Some lenders require the first year's insurance to be paid at closing.

Underwriting Fee: This goes to your lender and covers the cost of researching whether or not to approve you for the loan.

There are many different items that go into closing costs and you may feel very overwhelmed. Did you know that you can ask the seller to pay a portion or all of your closing costs? Although it may hamper the deal, you should consult your Realtor® on what the best strategy would be when negotiating the contract on the home.

Have more questions? Feel free to contact me.