Often times home buyers and sellers of real estate are unaware of what is encompassed by the term “closing costs”. This is especially true for first time home buyers. What is included as closing costs for your particular transaction may vary. However, below are some common closing costs, some of which you can expect to pay at the closing of your next home purchase.
Generally speaking, closing costs are defined as miscellaneous fees charged by those involved with the home sale (such as your lender for processing the loan, the title company for handling the paperwork, a land surveyor, local government offices for recording the deed, etc.). The average closing costs percentage is usually about 2-5% of the purchase price (e.g., ~$4,500 on a $180,000 home), but 1-8% is not uncommon. To be clear, no one chooses a specific percentage number—the closing costs will just happen to add up to a percentage. So, in addition to the down payment (typically 20% of the sale price), a purchaser will also owe the lender and third parties fees and other costs, which are generally paid at the time of the closing on the mortgage. Most of the time, it is the buyer that pays the closing costs rather than the seller, however, on some loans such as VA loans, the seller may pay a portion.
Your lender will give you an estimate of closing costs on the purchase of a particular house you’ve selected. This is called a “Good Faith Estimate” (“GFE”). If they don’t give it to you, ask for it. Then, the day before the closing, ask your lender for the actual “Settlement Statement” (aka “the HUD” or “the HUD-1”), which is the final and complete form with all the numbers for the sale, including the actual closing costs, as well as the Good Faith Estimates.
The following is a breakdown and estimate of the typical costs associated with closing a residential mortgage, along with a brief description of the service you are receiving.
Lender Related Closing Costs:
1. Origination Fee – Fee charged by the bank for making a loan to you. Generally around 1% of the purchase price. ($1,500 for a $150,000.00 price of the real estate)
2. Loan Application Fee – A fee charged to process an application for a loan and covers predominantly administrative costs. ($150)
3. Credit Report – The cost of obtaining a credit history report from one of the major reporting agencies. ($5-$25)
4. Private Mortgage Insurance – If your down payment is less than 20% of the purchase price, lenders require this insurance to protect them (not you) if they have to repossess and can’t sell the house for the remaining loan balance. Generally, the annual policy for the first year is paid at closing. In addition, the lender may collect up to three months worth of the following year’s premium at closing, and deposit the money into the escrow account. See Number 7 of this section.
5. Initial Interest – This is to cover the interest from the date you close until the end of the month. For example, if you close on Jan. 15, you will pay interest for the period of January 15th through the 31st. Your first payment will be due on March 1, which covers the interest for February, because interest is always paid in arrears, that is, after it has been earned by the lender (except for this initial interest). Depending on the interest rate, amount financed and down payment, the interest may accrue anywhere from $20-$40+ daily.
6. Document Preparation Fee – Charge for the cost of preparing documents such as the mortgage, note, truth in lending, etc. ($100)
7. Initial Deposit into Escrow – See number 4 – “Private Mortgage Insurance” of this Section, numbers 3 – “Homeowner’s Insurance”, and 5 – “Flood Insurance”, in the section “Other Items Potentially Required by Lenders”, and number 8 – “Proration of Property Taxes” under the Section “Title Related Closing Costs.”
8. Lender’s title insurance policy – Lenders require the purchase of a title insurance policy that protects their mortgage interest in the real estate. Title insurance rates are proscribed by law depending on the locality of the real estate and the loan amount. See our blog posts related to title insurance for a more complete understanding. ($250-$450)
Other Items Potentially Required by Lenders:
1. Survey – Lenders often require a registered land surveyor to conduct a survey of your property to define the property size and boundaries, and to see if any part of the building or other improvements are “encroaching” on a neighbor’s property — or the other way around. Surveys would also show any setback violations or other material matters that are considered problematic. Even if the lender does not require a survey, the purchaser may want to obtain a survey for the same reasons stated. ($300-$500)
3. Homeowner’s Insurance (first year premium) – Lenders will require payment of the first year’s hazard insurance (homeowner’s insurance) premium to protect, against fire, windstorms and natural hazards. In order to bind the coverage, the premium is often paid in advance of closing. If the homeowner’s insurance is to be escrowed going forward, the lender will also likely collect several months worth of the following year’s premium in advance at closing, which will be deposited into the escrow account. ($500-$2,500+ depending on the policy details and amount insured)
4. Flood Zone Certification – Determines the flood zone of the property and the base flood elevation. ($200-$400)
5. Flood Insurance – Depending on the findings of the flood certification, the lender may require that the collateral be protected by a flood insurance policy. The costs associated with this policy relate to the flood zone classification, the amount of coverage, and whether or not the home is built above the base flood elevation. Similar to the hazard policy, lenders will require the first year’s premium to be paid at closing, and may also collect several months worth of the following year’s premium at closing, which will be deposited into the escrow account. ($400-$2,000)
Title Related Closing Costs:
1. Homeowner’s title insurance policy – A homeowner’s title insurance policy protects the owner’s interest in the real estate from claims of ownership or other interests by others. Like the lender’s policy, the rates are mandated by law depending on the locality and the purchase price. It is a one time premium for a policy that is generally issued and paid for at closing. There is no requirement that an owner’s title policy be purchased, however, it is almost always recommended. Please see our blog posts on title insurance for a more complete understanding. ($500-$2,000)
2. Settlement Fee – A fee must be paid to a settlement agent who has prepared documents, calculated figures, and oversees proper execution of closing documents. This fee is often split between buyer and seller but can be negotiated as part of the sales contract. ($150)
3. Document Preparation Fee – Charge for the cost of preparing legal papers such as the Act of Sale (Deed), HUD-1, Seller/Owner Affidavit; etc. ($100-$150)
4. Notary Fee – Because there are legal documents involved, a licensed notary is required to acknowledge the fact that the proper people signed these official documents in their presence. Notaries often charge a fee for their services. ($150)
5. Abstract – A title insurance professional must perform a title search and produce documentation on the home’s title. The abstract is a concise summary of that search and official documents related to the immovable property. ($100-$200 depending on the length and complexity of the abstract)
6. Title Examination – The abstract is then reviewed by an attorney in order that he may issue an opinion on the “merchantability of the title”. Louisiana law requires that all title opinions be issued only by licensed attorneys. ($150)
7. Government Recordation Charges – The recording fee is paid to a government body which enters an official record of the change of ownership. ($85 for the Cash Sale/Deed, $225 for a mortgage, and these charges will vary slightly from parish to parish)
8. Proration of Property Taxes – Typically, the buyer will pay that percentage of the property taxes corresponding to the percentage of the year that the buyer will have owned the property. The lender may also collect property taxes on a monthly basis in the escrow account. If your property taxes are escrowed, you may pay up to several months in advance which will be collected at closing, and deposited into the escrow account. The amount will depend on how long for that year the buyer will own the property and the assessed value of the property.
Other Common Costs:
1. Courier Fees – For any overnight deliveries that may be required via Fed-Ex/UPS. ($15-$25)
2. Wire Transfer Fees – If your lender is funding the transaction with a wire, as opposed to a check, additional fees apply. ($15-$25)
3. Real Estate Commissions – This is your real estate agent/broker’s payment for their services representing you. (Generally 2.5% – 3% of the contract price for both the listing and selling agent, for a total of 5% – 6%) The listing agreement will specify the amount of the commission. It is most common in Louisiana for the seller to pay the real estate commissions.
It is important to note that it is unlikely that any one transaction will include ALL of the above mentioned costs. However, some combination of these fees will occur.
~ Andrew S. Mendheim