WHAT'S THE DEAL WITH CLOSING COSTS?
In addition to your down payment, you will also be paying fees charged by the lender, to you, for services that must be performed in order to close your loan. In some cases, we can negotiate for the seller's to pay some, or all, of your closing costs.
Average closing costs range from $2,500 - $5,000. If you want a more accurate number, most lenders will be able to give you an idea of your closing costs if you simply give them the address of the property you're interested in.
A common misconception about mortgage closing costs is that they all go to the lender, when in reality, many costs are related to services performed by others. Mortgage closing costs cover expenses associated with getting a home loan, such as appraisals, title fees, pro-rated taxes and insurance as well as any Home Owner's Association (HOA) fees. Let's break those down in a little more detail:
TITLE FEES
A title company makes sure that the title to a piece of real estate is legitimate and then issues title insurance for that property. Title insurance protects the lender and/or owner against lawsuits or claims against the property that result from disputes over the title.
Title companies also often maintain escrow accounts — these contain the funds needed to close on the home — to ensure that this money is used only for settlement and closing costs, and may conduct the formal closing on the home. At the closing, a settlement agent from the title company will bring all the necessary documentation, explain it to the parties, collect closing costs and distribute monies. Finally, the title company will ensure that the new titles, deeds and other documents are filed with the appropriate entities.
PRORATIONS
In most cases, but not all, buyers are charged for prorations. Charges show up as a debit on the buyer's closing statement and as a credit on the seller's closing statement. These can include yearly taxes, interest and HOA dues, if applicable.
The credits reimburse the seller for items the seller has prepaid for the time period the seller will not own the property. So, if you close on a home February 1st and the seller has already paid their HOA dues for that year, you'll reimburse them for the 11 months they paid for, but will not be using since they've sold the property to you.
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Here are a few more items you may see on your final Closing Disclosure that outlines all of the costs associated with your loan:
Origination Fee: Fee charged by the lender as compensation for providing services associated with preparing and servicing your loan.
Private Mortgage Insurance (PMI) Premium / Mortgage Insurance Protection (MIP) Premium: Insures the lender against loss in the event of defaults by borrower. These fees are often required if the borrower puts down less than 20% for their down payment.
Recording Fee / Filing Fee: Fees for recording documents in public records.
Settlement / Escrow Fee: Fee paid for settlement service provider to conduct the loan settlement and/or real estate closing transaction.
Credit Report: This fee goes to the credit reporting agencies like Experian, TransUnion or Equifax.
Home Owner's Insurance: Homeowners insurance is required to cover possible damages to your home. In the event of a fire or other damage, homeowners will receive this insurance to cover the costs of rebuilding. Your first year’s insurance is often paid at closing.
WHAT IF I CAN'T AFFORD CLOSINGS COSTS?
I get it, coming up with a downpayment AND enough for closing costs out-of-pocket can be daunting. In fact, these expenses alone cause many to put off buying a home. However, if you have money for a down payment, don’t let closing expenses crush your dreams – instead, we can work out a deal with the seller to pay for your closing costs.
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Have any questions? Please feel free to contact me!
Read more at https://www.quickenloans.com/blog/closing-costs-and-fees-explained#1jq5C4h3IY4YPY7K.99