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 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 additional money, and the purchase may not go through without it.
How Much Can You 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 2021.
Total closing costs to purchase a $300,000 home could cost anywhere from approximately $6,000 to $12,000—or even more. The funds typically can't be borrowed, because that would raise the buyer's loan ratios to a point where they might no longer qualify.
What About "Free" Closing Costs?
First-time homebuyers can sometimes catch a break and have their closing costs paid by a government agency. Check into county or state down payment assistance programs.
Not all state housing finance agencies (HFAs) provide down payments to buy a home, but some do. 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 this 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 refinancing, whichever first occurs.
One-Time Closing Costs for Buyers
Buyer's closing costs that are "non-recurring" are one-time charges for items such as:
- 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 along with the loan on the loan estimate
Nothing prevents you from shopping around to compare prices for some of these fees and services.
Lender fees can be the most significant of all closing costs.
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. In some cases, 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. 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. That 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. However, paying them will drive up your closing costs.