Down Payment & Standard Closing Costs
You’ve found your dream home, the seller has accepted your offer, your loan has been approved and you’re eager to move into your new home. But before you get the keys, there’s one more step–the closing.
Closing is the process of settling a real estate transaction and transfers ownership of the property from seller to buyer. And it can be a little daunting. As a buyer, you will sign what seems like an endless stack of documents and present cash in the form of a wire transfer or cashier’s check for the down payment and various closing costs. It’s the fees associated with closing that many times surprises many buyers who may simply hand over thousands of dollars without really understanding what they are paying for.
As a responsible buyer, you should understand your down payment and closing costs. They consist of both mortgage-related and government imposed fees and vary based on the county. Here are some common fees:
Down Payment: This is buyer’s investment in the home and varies based on the type of loan which is determined by the buyer’s creditworthiness. FHA loans typically require a 3.5% down payment. Conventional loans vary from 3% to 5% minimum.
Option Fee: This is money paid by a Buyer to a Seller for the option to terminate a real estate contract for any reason and be entitled to a refund of the earnest money. The option usually lasts for a short period of time (Option Period) during which the buyer can obtain a home inspection and perform other due diligence to gain comfort and confidence about the purchase. Option fees should not be confused with earnest money.
Home Inspection Fee: This fee pays for an examination of the property’s safety and current condition—depending on its findings—a buyer may choose to continue towards closing, renegotiate the sale price, request repairs, or cancel the sales contract.
Appraisal Fee: This fee pays for the appraisal of the property. You may already have paid this fee at the beginning of your loan application process. Credit Report Fee: This fee covers the cost of the credit report requested by the lender. This too may already have been paid when you applied for your loan.
Loan Origination Fee: This fee covers the lender’s loan-processing costs. The fee is typically one percent of the total mortgage. Loan Discount: You will pay this one-time charge if you have chosen to pay
points to lower your interest rate. Each point you purchase equals one percent of the total loan.
Title Insurance Fees: These fees generally include costs for the title search, title examination, title insurance, document preparation and other miscellaneous title fees. This fee is regulated by the state department of insurance.
PMI Premium: If you buy a home with a low down payment, a lender usually requires that you pay a fee for mortgage insurance. This fee protects the lender against loss due to foreclosure. Once a new owner has 20 percent equity in their home, however, he or she can normally apply to eliminate this insurance.
Prepaid Interest Fee: This fee covers the interest payment from the date you purchases the home to the date of your first mortgage payment. Generally, if you buy a home early in the month, the prepaid interest fee will be substantially higher than if you buy it towards the end of the month.
Escrow Accounts: In locations where escrow accounts are common, a mortgage lender will usually start an account that holds funds for future annual property taxes and home insurance. At least one year advance plus three months worth of homeowner’s insurance premium will be collected. In addition, taxes equal approximately to three months in excess of the number of months that have elapsed in the year are paid at closing. (If six months have passed, nine months of taxes will be collected.)
Recording Fees and transfer taxes: This expense is charged by most states for recording the purchase documents and transferring ownership of the property.
Consult one of our real estate advisors to find out which fees–and how much– you will be expected to pay to close on your prospective new home. Keep in mind that you can negotiate some of these costs with the seller during the negotiation stage. In some instances, the seller might agree to pay some or all of the settlement costs.