When you’re buying a home, you may be so focused on the down payment that you forget there could be payment required at closing. Closing costs are part of the buying and selling process, but they can get overlooked.
Because closing costs are different for everyone, you may not learn exactly what you owe until the closing date approaches. It could range between 2% and 5% of the total loan amount.
You will receive a detailed estimate at the pre-approval stage and a thorough closing disclosure at least three days before closing. Review the information closely and ask your lender questions on anything that isn’t clear.
Closing costs are determined by many factors, including your credit score, the size and type of home loan, the loan-to-value ratio and market conditions. Loan-to-value (LTV) is a ratio that compares the total mortgage amount against the appraised value of the property. Making a more sizeable down payment can lower your LTV ratio.
Closing cost can be broken into a few main categories. The first category is costs managed by the lender and the second is cost controlled by third parties. A potential third category applies in certain circumstances, depending on where the home is located.
Lender fees include costs associated with processing your loan, such as:
• Points, which you may pay upfront in exchange for a lower interest rate for the life of your loan. The cost of one point equals 1% of the loan amount.
• Origination fees pay for the processing and underwriting of the loan. (is there another way we can describe this… as we charge separate processing fees and I would hate to have someone reference to this and question that)
• Rate lock fee is an amount you pay to lock in the interest rate between the preapproval date and closing date. Many lenders offer to lock in your rate for free, depending on how long it will be before you close on the loan.
Third-party fees can include costs for services performed by parties other than the lender, such as the appraisal, home inspection, title services, homeowners association fees and government recording fees. Third-party costs also include pre-payments for taxes and property insurance that are held in an escrow account until they are due.
A smaller third category of fees can be required by law, depending on the location of the property. For example, pest inspections are required in some states and lead-based paint inspections are required for older homes. Flood certification must occur if the home is near a flood plain.
In tight housing markets with homes in short supply, buyers may offer to pay a greater share of the closing costs on the sale. Alternatively, when there is an abundance of homes for sale, sellers may negotiate with an offer to cover closing costs for the buyer.
There are limits for what is called seller concessions, meaning a seller can only pay up to a certain amount of the closing costs based on the value of the home. An experienced mortgage lender can help you by explaining all the options available based on your specific circumstances. It will depend on the type of mortgage loan being used and size of the down payment, among other factors.
When considering prospective lenders, ask them to explain which fees they charge at closing.