Home Buyer's Closing Costs
What Does it Cost to Close Escrow?
Buying a home involves more money out-of-pocket than just the down payment. Buyers also need money to pay for services rendered. These are known as closing costs, which are used to pay for items such as title policies, recording fees, inspections, courier charges, reserves to set up an impound account and fees that a lender charges. It is the fees a lender charges to make a loan that typically cost the most.
Closing costs are on top of (in addition to) the purchase price. This can come as a sudden shock to many home buyers who are only looking at the amount of their down payment, especially if the down payment is very low. They might not have the extra money to pay buyer's closing costs, and without money to close, the transaction might not close at all.
How Much Are Closing Costs?
As a rule of thumb, closing costs to buy a home run about 2 to 4 percent of the purchase price, with the average around 3% of the sales price. Much depends on the points and origination fees a lender charges to make the loan, which used to be disclosed on the buyer's Good Faith Estimate, but today is now called a loan estimate.
The total closing costs to purchase a $300,000 home could cost anywhere from approximately $6,000 to $12,000 or more. Typically, the funds cannot be borrowed because that could raise the buyer's ratios to a point where the buyer may no longer qualify for a loan.
Where Can a Buyer Get "Free" Closing Costs?
Sometimes, first-time home buyers can get their closing costs paid by a government agency. Depending on where you live, it could make sense to check into county or state down payment assistance programs. Not only do these programs provide the down payment to buy a home, but they often will either give you or lend the closing costs.
Programs that provide for buyer's closing costs assistance often will record an instrument in the public records that provides security for the loan but typically carries zero interest and has no set due date. It generally is paid off at the time of sale 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 called non-recurring. These fees are one-time charges for such items as:
- Title Policies
- Escrow or closing
- Wire fees
- Courier / Delivery
- Attorney fees
- State, County or City Transfer Taxes
- Home Protection Plans
- Natural Hazard Disclosures
- Home Inspection
- Lender fees paid in conjunction with the loan on the loan estimate.
Recurring Buyer Closings Costs - The Prepaids
Recurring fees are those buyer's closing costs that you will pay again and again. They are often fees collected in advance of closing for prepaid premiums and establishing impound / escrow accounts. They include such fees as:
- 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 that you close will dictate how many prorata 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 typically loans totaling more than 80% of your purchase price will demand an impound / escrow account.
Can a Seller Credit the Buyer for Closing Costs?
Always check with your lender before you negotiate an offer that involves a seller credit because the lender might not allow it. Further, TRID might not allow any changes in your closing statement within the final days of closing your transaction.
- If you are financing 100% of the purchase price, the lender might limit your credit to 3% 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.
- Lenders will not let a borrower receive cash from a seller at closing, regardless of what you may hear at those no-money-down seminars.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.