The stakes in real estate transactions are high – and often fraught with emotion for people who may well be engaging in the biggest purchase or sale of their lives. Furthermore, it takes a lot of different people working together to make a home purchase or other real estate transaction happen. The buyer and seller are just the beneficiaries of a tremendous amount of effort that takes place on the part of lenders, real estate agents, escrow representatives, property and title insurance agents, county registrars and local property tax officials – and no one in these agencies can work for free.
The good news is that if you are a buyer, you shouldn’t be blindsided by any significant unexpected costs: Federal laws require lenders to provide their customers with a good faith estimate, or GFE, of your closing costs, within three days of your loan application. All your expected closing costs are delineated in this document, though some of them can vary by as much as 10 percent when you get to the closing table.
It is important to compare the GFE with any HUD-1 forms you receive in the mail during the escrow process. You may receive more than one as the loan progresses. It’s important to read each one and compare the figures to those on the GFE. The information on page 3 of the HUD-1, located at the bottom of the second chart, will show you the difference between the figures on the two documents and outline which costs can’t increase and which ones can’t increase by more than 10 percent. You may be entitled to a refund if the lender miscalculated or failed to disclose certain items. Point out any discrepancies to your lender or your real estate agent.
Closing Costs When Buying a Home
As a buyer, using a conventional loan, you can expect to pay the following fees at closing:
- Origination Fees – This is a fee you pay to your lender for securing the capital for you. However, in some cases, the origination fee can be wrapped into the balance of the loan.
- Points – These are essentially fees you pay to “buy down” to a lower interest rate. For example, your lender may give you an option of a loan at 5 percent with no points, or a loan at 4 percent with a payment of 1 percent of the mortgage value at closing. Each “point” is 1 percent of the loan amount.
- Credit Check Fee – Self-explanatory. The lender has to pay a fee to run your credit report. They pass this fee on to you.
- Appraisal Fees – These are fees for an independent appraisal of the property’s value to the lender.
- Lender’s Attorney’s Fee – Yeah, this is kind of the lender’s problem, not yours. Consider objecting.
- Title Services and Lender’s Title Insurance – Title insurance provides coverage in case the seller does not own the title free and clear, and someone else comes to claim an interest in the property at some later date. This fee pays for a title search as well as a premium to compensate the lender in the event the title is in question.
- Owner’s Title Insurance – This insurance protects you, as opposed to the lender. If the seller does not have clear title to sell, and another claimant emerges with a legitimate interest in the property, title insurance ensures that you will be financially made whole.
- Property Inspection Fees – At a minimum, you should have a home inspection and a wood-destroying pest inspection done. Additionally, you may want to get a water inspection, a septic inspection, or a radon inspection, depending on the property.
- Transfer Taxes – These are fees your municipal or state government may tack on for the effort required to update property records, search for outstanding liens on the property, and issue a new title. This tax is based on the sale price of the home.
- Escrow Deposit – You will need to come up with money to give to the escrow company to pay for recurring charges on your property, including property tax and insurance.
- Homeowners Insurance – You will need to obtain homeowners insurance coverage on the property prior to closing. Consider getting it in place about two weeks prior to closing.
As a buyer, you shouldn’t normally be required to pay any real estate agent or broker fees. For residential transactions, unless the buyer specifically requests a buyer’s agent rather than a traditional real estate agent, the agent is always paid by the seller.
Shared Closing Costs
The buyer and seller each share the prorated property taxes, as well as prorated property insurance costs, which are calculated based on the date the change of title is stamped and recorded. The date of recordation is not necessarily the same as the closing date. The seller will pay property taxes up through the date of recordation, and the escrow company will pay the remainder out of your escrow deposit.
Closing Costs When Selling a Home
For sellers, the transaction is simpler, but no less expensive: The seller typically pays real estate commissions for both the listing agent and the buyer-side agent. Some sellers bypass the real estate agent, however, offering their homes for sale directly – “For Sale Buy Owner,” or FSBO - and potentially save tens of thousands of dollars in closing costs. The downside: It could take awhile to sell the house, unless you have a buyer in mind already.
As a seller, you can also expect to pay your last prorated utility, water and trash pickup bills.
Depending on your jurisdiction, you may also get tagged for transfer or stamp taxes at the municipal, county or state level. Your real estate agent should be able to give you a full breakdown on fees and taxes required of you for your particular locale.
In sum, no matter which side of the transaction you’re on, expect to bring some additional cash to the closing table. The total amount that buyers and sellers pay can vary widely depending on origination fees, commissions, local taxes, and other factors. For more detailed information, you can read the Department of Housing and Urban Development’s Guide to Settlement Costs.