Understanding closing costs when buying a new home

This is pretty much my least favorite topic. I don't make the fees. They are just inevitable, whichever way you slice this pie. Having a knowledgeable agent that can spot unnecessary fees could really save you some money. Don't get too overwhelmed with this because we can work up an estimate of costs and fees so that you have a good understanding of what to expect. Here's a list of potential fees to look out for.

Real Estate Broker Commission/Fees: The cost of your agent's services

Loan Fees - Direct Loan Costs: fees associated with obtaining a loan such as the ones listed below

  • Loan Origination Fee - This fee covers the lender's cost of obtaining financing and administration for your loan.
  • Loan Discount (or "points") - This is a one-time fee charged by the lender in order to give you a lower interest rate on your loan.
  • Appraisal Fees - The appraisal fee covers the cost of getting an estimate of the market value of your home, usually by an independent, certified, and licensed appraiser.
  • Credit Report Fee - Mortgage lenders require a credit report to determine whether or not you are eligible (have good enough credit) for a loan, how much they will lend you, and at what interest rate.
  • Lender Inspection Fees - A lender may require certain inspections to take place before closing (particularly where new construction or recent repairs are involved
  • Mortgage Insurance Application Fee - There are often fees associated with processing an application for mortgage insurance.
  • Mortgage Broker Fee - This fee covers the costs of services of a mortgage broker if one is engaged by the borrower to help them shop for mortgage financing.
  • Prepaids - Items Required by the Lender to be paid in advance - There are certain items the lender may require you to pay at the time of closing or in advance of the actual closing date. These could include:
  • Interest - Lenders usually require payment of loan interest from and including the day of closing through the end of the month of closing. After that, interest is accrued and paid as part of the monthly loan installments.
  • Mortgage Insurance Premium - At the settlement, you may be required to pay your first year's mortgage insurance premium or a lump sum premium that covers the life of the loan.
  • Hazard Insurance Premium - Oftentimes lenders require payment of one year's hazard insurance, commonly referred to as homeowner's insurance, against fire, windstorms, and natural hazards. In order to bind the coverage, the premium is often paid in advance of closing.
  • Flood Insurance - Depending on the location of your home, flood insurance may be required, and payment of the first year's premium must be made in advance of closing.
  • Escrows/Reserves - Although the lender isn't required to provide an estimate of the reserves they will be collecting, it is important that you be aware of whether the lender will or will not be "escrowing" for taxes, mortgage insurance (if any), hazard and flood insurance. The use of an escrow account to build up the funds needed to pay these items as they become due can often be a good way for borrowers to budget rather than having to pay these large sums out-of-pocket when they come due. Be sure to ask your lender in advance of closing how these items will be paid in the future.

Title and Closing Charges: These fees cover the administrative costs of a title search, title examination, issuance of the title commitment/binder, and final title insurance policy(ies.) Also included would be charges for conducting the closing/settlement/escrow.

  • Settlement/Closing Fee - A fee must be paid to a settlement agent who has prepared documents, calculated figures, and oversees proper execution of closing documents.
  • Abstract of Title, Search, Title Examination, Title Insurance Commitment or Binder - In order to ensure that there are no pre-existing problems with your property, a title insurance professional must perform a title search and produce documentation on the home's title.
  • Document Preparation - Some settlement agents charge for the cost of preparing legal papers such as the mortgage, deed of trust, note or deed and/or other loan and title documentation.
  • Notary Fee - Because there are legal documents involved, a licensed notary is required to acknowledge that the proper people signed these official documents in their presence. Notaries often charge a fee for their services.
  • Attorney Fees - Both the homebuyer and the seller might have their own legal representation to prepare and record legal documents. Frequently, however, where an attorney is acting as a settlement agent, there may only be one involved in the closing.
  • Title Insurance - There are two kinds of title insurance policies: Loan and Owner's policies. The cost for the Loan Policy is based on the loan amount and the cost for the Owner's Policy is based on the sales price of the home.

Recording/Government Filing Fees

Buying a home is not only a big investment, it is also a matter of public record. The property information and the loan information are required to be filed at the county courthouse or other local government recording office.

  • Recording Fees - The recording fee is paid to a government body which enters an official record of the change of ownership.
  • Transfer Taxes, Document or Transaction Stamps - These are government charges based on the amount of the mortgage and, often, also on the purchase price. Depending on your location, there could be a city, county, state tax involved, or some combination.
signing mortgage

Other, Miscellaneous Charges -

  • Survey Fee - Lenders and title insurers often require a surveyor to conduct a survey of your property to define the property size and boundaries to see if any part of the building or other improvements are encroaching on a neighbor's yard — or the other way around.
  • Inspection Fees - When homes are sold, an inspection is often recommended and in some cases the contract may even be contingent upon an acceptable inspection report. This fee covers the cost of an inspector to check the dwelling for any problems or issues. Frequently, this is a sales contract term imposed by the homebuyer to obtain an accurate assessment of the condition of the property. There are several inspections that a future homeowner might want to request and a lender might require. These could include pest inspections (termites and other wood-destroying organisms), lead paint inspections (for structures built before 1978), roof inspections, water/well certifications, structural or mechanical inspections, or additional specific inspections based on the property type and location.

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