How Much Are Closing Costs for the Buyer?
What to Expect With Buyer's Closing Costs
Buying a home involves coming up with a good bit more money out-of-pocket than just the down payment. Buyers must also have money available for closing costs such as title policies, recording fees, inspections, courier charges, reserves to set up escrow or impound accounts, and various fees that lenders typically charge.
The total cost can come as a shock to many homebuyers who are only looking at coming up with the amount of their down payment. They might not have the extra money, and the transaction might not close at all without it.
Lender fees can be the most significant of all closing costs.
How Much Can a Buyer Expect to Pay?
Closing costs to buy a home typically run from about 2% to 7% of the purchase price, with an average of around 3%. Much depends on the points and origination fees a lender charges to make the loan.
Points and origination fees used to be disclosed on the buyer's Good Faith Estimate. This document is called a loan estimate as of 2020.
Total closing costs to purchase a $300,000 home could cost anywhere from approximately $6,000 to $12,000 or even more. The funds can't typically be borrowed because that would raise the buyer's loan ratios to a point where they might no longer qualify.
"Free" Closing Costs
First-time homebuyers can sometimes catch a break and have their closing costs paid by a government agency, so check into county or state down payment assistance programs depending on where you live. Not all State Housing Finance Agencies (HSAs) provide down payments to buy a home, but some do, and others will often lend closing costs on favorable terms that won't affect loan ratios.
Programs that provide for buyer's closing cost assistance often record an instrument in the public records to provide security for the loan, but the loan typically carries zero interest and has no set due date. It must be paid off at the time of sale if the homebuyer later sells the property, or upon a refinance, whichever first occurs.
Non-Recurring Buyer Closing Costs
Buyer's closing cost fees that are paid once and never again are "non-recurring." These fees are one-time charges for such items like:
- Title policies
- Escrow or closing fees
- Notary fees
- Wire fees
- Courier/delivery fees
- Attorney fees
- Recording fees
- State, county or city transfer taxes
- Home protection plans
- Natural hazard disclosures
- Home inspections
- Lender fees paid in conjunction with the loan on the loan estimate
Nothing prevents you from shopping around and comparing prices for some of these fees and services.
Recurring Buyer Closings Costs
Recurring fees are buyer's closing costs that you'll pay again and again, either monthly or yearly as time goes on. They're often fees collected in advance of closing for prepaid premiums and establishing impound/escrow accounts. They include:
- Fire insurance premium
- Flood insurance (if required in your area)
- Property Taxes
- Mutual or private mortgage insurance premiums
- Prepaid interest
The time of the year when you close will dictate how many pro rata months of premiums the lender will collect to hold against future payments of taxes and insurance.
Not every loan requires an impound or escrow account, but loans totaling more than 80% of your purchase price will demand them.
A seller credit, sometimes referred to as a seller concession, is effectively money contributed to the buyer from the seller to cover some closing costs. Seller credits are not paid to buyers directly. Instead, the amount is rolled into the sale price of the home, lowering the cost of the overall loan.
Always check with your lender before you negotiate an offer that involves a seller credit because the lender might not allow it. Some common scenarios include:
- The lender might limit your credit to 3% of the purchase price if you're financing 100% of the purchase price.
- Depending on your FICO score and the amount of your down payment, the lender might allow a seller to credit you as much as 6% of the purchase price.
Further, TRID—the TILA RESPA Integrated Disclosure rule that governs mortgage disclosure statements—might not allow any last-minute changes to your closing statement in the final days before closing, and these credits will be notated on your closing statement.
Lenders also sometimes offer credits toward some of your closing costs, but you'll have to agree to pay a higher interest rate over the life of the loan. This can save you cash now but cost you more later.
When More Costs Might Be Better
Lenders will often permit you to pay "points," sometimes called "discount points," at closing. These fees are paid in exchange for receiving a lower interest rate over the life of the loan, which could potentially save you money in the long run. One point usually runs around 1% of the amount you're borrowing.
Paying them will drive up your closing costs, however.
NAIC. "The Smart Consumer’s Guide to Reducing Closing Costs," Page 4. Accessed March 26, 2020.
Michigan State Housing Development Authority. "MI Home Loan." Accessed March 26, 2020.
FDIC. "Down Payment and Closing Cost Assistance," Page 21. Accessed March 26, 2020.
Consumer Financial Protection Bureau. "What Fees or Charges Are Paid When Closing on a Mortgage and Who Pays Them?" Accessed March 26, 2020.
Consumer Financial Protection Bureau. "Learn About Loan Costs." Accessed March 26, 2020.
Consumer Financial Protection Bureau. "Comment for 1026.38 - Content of Disclosures for Certain Mortgage Transactions (Closing Disclosure)." Accessed March 26, 2020.
American Financing. "How Do Seller Concessions Work?" Accessed March 26, 2020.
Consumer Financial Protection Bureau. "I Am Getting a Mortgage Loan and I Have Heard the Term 'Trid.' What Does 'Trid' Mean?" Accessed March 26, 2020.
Quicken Loans. "What Are Mortgage Points And When Are They Worth It?" Accessed March 26, 2020.