The Unexpected Costs of Buying a House - Closing Costs

There are costs, in addition to the purchase price, that you will incur at the time of closing. These closing costs are various fees charged by those involved with the transfer of the property from the seller to the buyer. Some fees are paid by the seller; some are paid by the buyer. Who pays what is always negotiable. Do not ignore closing costs as part of your total purchase amount.

What the Buyer Typically Pays

• All fees to do with obtaining the loan.
• Appraisal - to confirm the purchase price does not exceed market value.
• Home inspection - always have one to know what you are really getting.
• Pest inspection - required in most Southern states because, in humid climates, there are many crawly things that eat and destroy homes (termites, powder post beetles, flying ants, etc.).
• Homeowners insurance - typically prepaid for one year at closing.
• Mortgage insurance - if borrowing more than 80 percent of the value of the property.
• Survey - often not required, but it does make sure property boundaries are accurate.
• Property taxes - from the day of closing to December 31.
• Interest - mortgage interest paid from date of closing to thirty days before first monthly payment is due.
• Attorney fees - where applicable.
• Title insurance - yours and the lender's.
• Escrow fees - if you or the lender choose to escrow any of your taxes or insurance.
• Loan discount points - if you paid for a lower interest rate.
• Fee for recording the documents.
• Transfer taxes - if there are any. Many states charge a tax to transfer property to a new owner. For example, $1 per $1,000 of selling price. Check with your county, not state, to find out your rates.

Typical Closing Costs and Their Definitions

Appraisal Fee - The lender will require an appraisal. They want to confirm the value of the property they are lending against. The appraisal fee is paid to an appraiser to obtain an estimate of market value of the property.

Attorney Fee - Attorney fees are paid to the closing attorney or Title Company for closing the transaction.

Credit Report - An evaluation by a credit bureau of the buyer's credit habits.

Hazard Insurance - Insurance that protects a property owner against damage caused by fires, severe storms, earthquakes, or other natural events. Typically, the buyer will be required to pay for a year's worth of premiums at closing, but this will depend on the exact details of the policy.

Inspection Fees - Lenders require a general property inspection before they will lend on a property. There will also be a fee for any inspections the buyer wants including: septic inspection, termite and pest inspections, mold, radon gas, etc.

Loan Origination Fee - A lender's fee to the borrower for establishing a new loan. Conventional loan origination fees range from one to three points. A point is equal to one percent of the loan. For example, on a $100,000 home, a point is $1,000.

Mortgage Insurance - Typically required on conventional loans when borrowing more than 80 percent of the appraised value. The cost may range from a half percent to 1 percent per year and fourteen months premium is often collected at closing. This is coverage for the lender in case of default.

Prepaid Interest - Mortgage interest from the date of closing to thirty days prior to the first regular mortgage payment.

Recording Fees - Charges by the County Recorder to record documents required to clear or transfer title.

Survey - Shows boundaries of a piece of real estate, whether buildings or other improvements are actually located on the property, and that surrounding buildings or improvements do not encroach on the property.

Tax and Insurance Escrow - If the new loan is going to have an escrow account for the payment of taxes and insurance, the lender will require from two to ten months payments to be deposited at the time of closing, depending upon when the next taxes or insurance need to be paid out of the escrow account.

Title Examination Fee - Cost to review the title to the property for liens, mortgages, easements, or defects.

Title Insurance - Covers title defects and certain unrecorded liens that may not be found in the title examination. Cost of title insurance is based on the loan amount or purchase price and is required by most lenders. The cost depends on the amount of the loan for a lender's policy, or the purchase price for an owner's policy. A lender's title insurance policy does not insure owners.

The above fees for processing the loan are typically paid at closing, meaning this money must be readily available. If rolled into the loan these fees, plus interest, will be paid over time.

HUD1 Settlement Statement

Closing costs will be itemized for both buyer and seller on a document called a HUD1 Settlement Statement. This form will be filled out by the attorney or title company and will be displayed to both buyer and seller at closing to show all fees each will pay to purchase, transfer, and record the transfer of property.

Ask that a copy of the HUD1 Settlement Statement be provided to you twenty-four hours before your scheduled closing so you can confirm all fees you are to pay and the amount you need to bring to closing. This is common practice but often does not happen unless there is a specific request for it from the attorney or closing agent.

When you receive the HUD1, typically twenty-four hours before your scheduled closing, examine it to make sure it does not differ significantly from the lender's original good faith estimate. If there are significant discrepancies, have them corrected.

Calculating Your Closing Costs

When calculating your closing costs, always start with your down payment. Lenders typically require 10 percent to 20 percent of the purchase amount as a down payment at closing. This is where the amount you need readily available begins to add up.

Even if paying cash for your home, you will pay closing costs. Fees such as recording fees for the deed, title insurance, and transfer tax still apply. Costs vary from area to area and transaction to transaction, so consult your local real estate agent or attorney to find out which fees you are required to pay. They can also calculate estimated costs you are responsible for based on your purchase price. Again, many of these fees are negotiable as is who will pay them, buyer or seller.

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