Who pays the closing costs? Usually both sides do
Typically, buyers and sellers each pay their own closing costs.
A home buyer is likely to pay between 2% and 5% of their loan amount in closing costs, while the seller could pay 5% to 6% of the sale price to their real estate agent.
But it doesn't always work that way.
Buyers may be able to get another person – such as the seller, the lender, or a down payment assistance program – to cover some or all of their expenses.
Here's what you know about closing costs and how you can avoid them.
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Buyer's closing costs
When most people think about closing costs, they think about the buyer's closing costs. These are your expenses for setting up a home loan, valuing the home, transferring the title in your name, etc.
Buyers typically pay between 2% and 5% of their loan amount as closing costs.
So if you were to take out a $ 200,000 mortgage loan, the closing cost could be anywhere from $ 4,000 to $ 10,000 (although it would likely be on the lower end of that spectrum.)
The amount a home buyer must pay for closing costs can vary widely based on the home price, location, and other factors.
Typical closing costs paid by the buyer
Here are the most common and expensive closing costs home buyers have to pay:
Origin fee – This is the lender's fee for their services, including the cost of reviewing your documents, processing your application, and setting up the loan. The origination fee is often around 1% of the loan amount
Evaluation fee – A house valuation usually costs around $ 500but could be up to $ 1,000. The house appraisal usually takes place after an inspection of the property
Title search and property insurance – A title search ensures that the title of your new home is clear so that no one else can claim rights to the home or property. Property insurance offers protection against undiscovered claims
Mortgage insurance in advance or financing fee – Some types of home loan require an upfront fee to insure or “guarantee” the mortgage. Government-backed loans, including FHA, VA, and USDA mortgages, have such a fee. However, you can usually include these in your loan amount instead of paying them when you close
Discount points – – Discount points You can “buy” a lower interest rate by paying an additional fee upon completion, which is usually 1% of the loan amount. Check your interest rates for rebate points, as some lenders offer lower mortgage rates upfront, provided the buyer purchases points on completion
Crooked – You will need to prepay some of your future property taxes and homeowner insurance premiums. This prepaid money is transferred to an escrow account and paid out when necessary
Your deposit will also be due upon graduation, although this is usually not considered a closing cost.
Any money you paid for the home when you submitted a quote will be counted towards your deposit upon completion.
Also note that the closing costs will depend on the mortgage lender.
While some closing costs are set by a third party and cannot be changed, others are controlled by the lender and can vary widely.
Shopping at the lowest cost is an easy and effective way to lower your closing costs as a home buyer.
Closing costs of the seller
Sellers also have closing costs. Unfortunately, they don't have the same flexibility to buy and negotiate lower closing costs as buyers.
But home sellers should still be aware and willing to pay the expenses of their sale.
The largest single item in a seller's closing costs is usually the commission paid to real estate agents. This is usually 5% or 6% of the purchase price. Yes, this is often shared with the buyer's agent – but usually it is still paid for by the seller.
Home sellers should also expect fees for transfer taxes, title fees, escrow fees, etc.
There is not much you can do about some taxes and fees. However, your agent's commission may be negotiable.
As a seller, if you want to avoid closing costs, you should look for alternatives: sell your home yourself; Find a discount broker or use another agent.
Reviewing all of your options will give you a bargain.
If you want full service, you have to pay for it. But sellers can often shop and receive a lower commission rate than what they originally stated.
The closing costs vary depending on the type of loan
For borrowers, the type of mortgage you choose can have a huge impact on your closing costs. And the biggest of these is mortgage insurance.
Mortgage Insurance (MI) is only paid for by those with small down payments – less than 20% of the home's market value. And usually there is a sliding scale. Your MI costs are likely to be higher the lower your down payment is.
Most of the mortgage insurance burden comes in the form of an annual premium that you pay monthly.
However, an initial mortgage insurance premium may also be due on the final day.
FHA Advance Mortgage Insurance Premium (UFMIP)
FHA loans require annual mortgage insurance and an upfront insurance fee.
The latter – called UFMIP (Upfront Mortgage Insurance Premium) – is equal to 1.75% of the loan amount or USD 1,750 per USD 100,000 borrowed.
Despite the name, FHA mortgage insurance doesn't have to be paid for when you take out. Most borrowers roll these costs into their loan amount instead of paying it with cash.
Adding UFMIP to your loan will greatly reduce your closing costs. However, this means that you will earn interest on the fee over the life of your home loan.
VA loan finance fee
VA loans do not require annual mortgage insurance. They do, however, require a one-time "funding fee" which is due upon completion.
For first-time home buyers, the VA financing fee is typically 2.3% of the loan amount. Buyers who have previously taken out a VA loan pay 3.6% of their loan amount. If you pay a deposit of 5% or more, the VA financing fee is reduced.
VA home buyers also have the option to include this fee in their loan amount rather than paying it along with their closing costs.
USDA guarantee fee
Like the FHA loan, the USDA home loan program requires both an upfront and annual mortgage insurance fee.
The USDA upfront fee is 1% of the loan amount and can be added to the mortgage balance to reduce closing costs.
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How to buy the lowest closing cost
The amount you pay as closing costs can vary widely depending on the lender. This is why you need to consider both closing costs and interest rates when buying a mortgage.
The amount that you are expected to pay fees will be listed in your loan estimate. This is a standard document that lenders must give you when applying for a home loan.
Loan Estimate is an easy way to compare fees and see which lenders are cheaper overall – which may be different from those who only offer the lowest mortgage rates.
Compare the closing costs to your credit estimate
Here is an example of Page 2 of the Standard Credit Estimate, which lists all of the fees a buyer can expect on the closing day.
Image: Bureau for Financial Consumer Protection
Pay particular attention to Section (A), “Loan Costs”. These are the lender's fees – the main ones to consider when shopping for comparison.
The first line, "Points", shows how much you will pay to "buy" the price offered. The next two lines, "Application Fee" and "Subscription Fee", show what the lender charges for their services.
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4 ways to avoid closing costs
Home buyers don't always have to pay the closing costs out of pocket.
There are several ways you can cut your costs – or, if you're lucky, avoid them altogether.
1. Negotiate closing costs between lenders
Credit estimates are just offers. And you can negotiate freely.
When you get estimates with lower interest rates but higher closing costs, and vice versa, call the lenders and let them compete for your business.
"I'd love to work with you, but your origination fee is X amount higher than Lender Y's," might be a good start.
Don't expect your closing costs to disappear entirely. However, you may be able to cut your upfront costs or even your interest rate significantly by simply asking for it.
2. Closing costs paid by the lender
Some (but not all) lenders have their own programs that can help with closing costs and down payments. These come in the form of a "lender loan".
A lender loan usually means that the lender will pay some or all of the upfront costs – and in return you will pay a higher interest rate.
For example, Bank of America has their America & # 39; s Home Grant® program. It offers a lender loan of up to $ 7,500 that can be used for one-time acquisition costs such as property insurance and enrollment fees, or for the permanent purchase of the interest rate (discount points). The funds do not have to be repaid. "
And advance payment grants are granted separately.
As you'd expect, this quote from the BoA website references a footnote that contains a stack of terms and conditions. But his offer is genuine enough – as are countless others from other lenders.
3. Let the seller pay your closing costs
Many buyers can avoid closing costs by getting the seller to pay them instead.
This agreement is known as the "Seller's License".
Usually the money comes from the sales proceeds. The seller does not have to write a check as the amount is deducted at the closing.
Note that cashback is not possible here. The total amount of the buyer's closing costs is the maximum that can be put on the table.
There is a limit to the amount of money a seller can contribute to the buyer's closing costs. By loan type, these limits are:
Conventional Loans – 3% of the house value for a deposit of less than 10%; 6% with a deposit of 10% -25%; and 9% if largerFHA – 6% of the house valueVA – 4% of the house value. However, sometimes it is higher because not all closing costs are taken into account when calculating your percentageUSDA – 6% of the house valueInvestment propertys – 2% of the house value
Seller concessions are not uncommon. The main problem, however, is that sellers are much more likely to pay the buyer's closing costs if they are motivated to sell the home.
In a competitive buyer market, sellers are far less likely to make such a deal.
If so, you may want to look for help elsewhere – for example, a program to help with closing costs.
4. Rolling closing costs into your loan amount
Refinancing loans have closing costs, just like home loans. And they usually cost about the same amount.
Homeowners looking to refinance can look for the lowest closing costs. However, there is no home seller to help them pay.
However, current homeowners have one option that home buyers don't: they can often include closing costs in their loan amount.
Remember, there is no free lunch.
You pay off those closing costs – and the interest on them – until you pay off the mortgage, sell the home, or refinance the home again.
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For those who need additional help with closing costs, there is another way: assistance with closing costs.
Support with closing costs can come in the form of grants, loans, or gift money to help cover your upfront costs.
Here's what you should know about each one.
Graduation grants and loans
Closing Expense Support is part of many Down Payment Support (DPA) programs.
There are thousands of deposit assistance programs across the country – that is, there is bound to be one (possibly more) that will cover the area you are looking to buy from.
Every DPA program is different.
Some offer a loan that you pay back in parallel with your mortgage. Others offer forgivable no-payment loans that do not require repayment as long as you stay in your place of residence. Others give direct grants that never have to be paid back
As the name suggests, there are primarily data protection authorities that you can use to fund your down payment.
Often, however, this money can also be used to cover your closing costs. Just make sure this is allowed by the programs you are applying for.
Gift money from family and loved ones
Lenders are generally relaxed about receiving gifts for your down payment and closing costs from loved ones.
Fannie Mae and Freddie Mac define “loved ones” as family, fiance (s) or life partner. But other programs (such as FHA loans) expand the field to include close friends.
There are two strict rules for such gifts.
First of all, you need to provide a letter from the donor confirming that it is a gift that will never have to be repaid. Second, you need to document the source of the money. For example, if a family member gives you the money and redeems stock for it, they may need to produce a brokerage statement stating that they are selling those stocks
This is usually pretty easy. But lenders can get picky when they suspect you are hiding something. It is therefore important that your gift items are properly procured and documented.
Please see this article for more information on receiving gift funds for your closing costs.
The final result
Who pays the closing costs? Buyers and sellers both do this.
If you are a home buyer, you are likely paying 2% to 5% of your loan amount at the closing table (and that on top of your down payment).
However, if you spend some time comparing lenders and seeking help, you might end up paying a lot less than you should have.
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