Buyer Closing Costs – The Basics

When you apply for a home loan, your lender should provide you with a good-faith estimate or loan estimate, outlining all the details of the loan, including, importantly, your anticipated “closing costs”. Closing costs can vary with the purchase price, local regulations, the type of loan applied for, and the terms of the purchase agreement.  It is important to understand these expenses, most of which are paid at the closing table, and to plan for them. Typical buyer closing costs include:

Lender Fees

Loan Origination Fee: Some lenders levy this fee to cover their administrative costs: often about 1% of the loan amount.

Discount Points: A one-time fee paid to the lender to lower the interest rate on the loan. A point equals 1% of the loan amount. Each point will subsequently lower your interest rate by a certain amount and thus reduce your mortgage monthly payment: the lender will explain this when reviewing the variety of loan products they offer.

Appraisal: Every lender requires an appraisal to be completed on a home. The appraisals range from $500 upwards, depending on the size and nature of the property.

Credit Report: Lenders will run a credit report to determine the credit risk of the borrowers and use this in the decision making process of approving the loan and its terms.

Survey: A survey is usually required on a townhouse or single family home, but not on a condo. Cost starts around $650-850 but will also vary with the size and nature of the property. It is important to work with your Realtor to find out if a fairly recent survey of the property, one acceptable to your lender, exists before you pay for a new one.

Miscellaneous Lender Fees: This can be a gray area. Fees may range from $450-$1000. Make sure to ask the lender what these fees cover and use these as an opportunity to negotiate!

Pre-Paids and Reserves Deposited with the Lender

In  Virginia, lenders will require borrowers to pay certain items “forward” at closing and to escrow funds monthly to pay certain expenses. Some of these escrows are required by law and some are customary.

So, you will make the initial payments and escrow deposits at closing and then make monthly deposits (as appropriate) thereafter. Each year, your lender will send you an Escrow Deposit Disclosure Statement advising you of the progress of these accounts and potentially adjusting the amount required monthly so that they are not collecting too little or too much funds.

Pre-paids and reserve/escrow items may include:

Advance Interest: Lenders will require the borrower to pay interest from the date of settlement to the 1st of the next month. The closer to the end of the month that you settle, the smaller this fee.

Mortgage Insurance Premium: This an insurance premium paid if the buyer buys a property with less than 20% down.

Hazard/Home Owner’s Insurance: This insurance protects the buyer and lender against losses due to natural hazards, such as wind, fire, storm, etc. You may be asked to pay 6 or 12 months of this in advance and then there will be a provision to escrow funds monthly for future payments. Starting in 2024, Homeowner’s insurance rates are rising rapidly, so shop early for this necessary protection.

Property Taxes: Property taxes vary by jurisdiction and are typically paid twice a year. A portion of a buyer’s monthly mortgage payment goes into escrow for taxes to be paid out by the mortgage company when the tax bill is received. Most lenders require 3 months of property taxes to be escrowed at settlement.

Homeowner Association/Condo Association Fees: Certain lenders will want this to be paid into escrow upfront at settlement. The amount depends upon the particular homeowner or condo association.

Prorations

Prorations are adjustments made to the closing figures to account for items such as homeowner’s association fees, property taxes and propane/fuel in place,  which the seller has already covered in advance and the buyer needs to refund to the seller ( or vice versa).

For example, if the seller has already paid the property taxes on the home through the end of the year and you close on November 30th, there will be a proration on the settlement statement because you “owe” one month’s taxes to the seller.

Title and Recording Charges

In this category are the fees charged by the settlement company or closing attorney and the fees and taxes charged by the county or city for recording the deed and deed of trust.

Settlement Fee/Title Exam: This fee can vary with different settlement companies or attorneys, it is but is typically $700 – $900.

Title Abstract and Search: This covers the service that the title company performs to make sure that there are no outstanding liens on the property.

Title Insurance: This protects the lender and the buyer from any future title claims. Lender insurance is required and owner insurance is optional: discuss this with your settlement agent. Title insurance costs is paid for with a a one-time premium paid at settlement.

Documentary Stamps on the note: this is a fancy way of saying State and Local recording fees or taxes on both the deed (the transfer of ownership) and the deed of trust (the mortgage).

Your lender must meet certain obligations under the Truth-In-Lending Act.

Download HUD’s Home Buyers Guide to Settlement Costs, Shopping for Your Home Loan.