Quite often, first time home buyers are taken aback when faced with closing costs. In addition to the down payment, which is typically 3.5%-20% of the agreed upon sales price, closing costs are the final hurdle. According to the National Association of Realtors, when estimating how much you’ll need at closing, a good rule of thumb is 2 to 4 percent of the purchase price. For example, using 3 percent as a midpoint gauge, closing costs for a home with a purchase price of $200,000 would be $6000. Several factors will influence the actual amount of the closing costs, such as the amount for prepaid property taxes, insurance escrow accounts, and what the lender charges for the loan (points and origination fees). Those details are disclosed to the buyer in what is known as a Good Faith Estimate, or GFE.
Since the Real Estate Settlement Act went into effect, mortgage lenders are required to provide home buyers with details regarding the estimated approximation of closing costs in a GFE. In an effort to accurately convey what the buyer’s financial responsibility will be, the GFE must be given to the buyer no more than three days after the loan application has been submitted.
In addition to supplying the buyer will details about all of the costs involved in the home purchase; the GFE is considered a standard form used by prospective buyers. It is a useful tool for comparing quotes from several different mortgage lenders. Because there are differences in closing costs that vary from county to county and state to state, buyers need to retain an experienced real estate attorney or closing agent (depending upon the state that the property is located in) to insure that everything is in order. When you buy a home, the closing costs include all of the expenses incurred during the sale of the home and implementation of the mortgage. As a potential buyer, it is best to wait and see what the settlement costs are before signing any loan contracts. Prior to closing your loan, you’ll want to review your HUD-1 closing document with the final closing figures. Whenever possible, ask your mortgage professional or closing agent for a copy of the HUD-1 well in advance of sitting down at the closing table. In doing so, you’ll have time to deal with any concerns and/or mistakes.
The variety of expenses associated with the closing include fees for items such as a credit report, title insurance, document preparation, the survey, mortgage insurance application, attorney, city and county tax stamps, and underwriting. Please note this does not reflect a complete list of closing cost charges. Also there are fixed expenses that cannot change at closing, charges that can increase up to 10%, and costs that can change slightly prior to closing.
One Time Expenses
One-time fees that are paid once only at closing are referred to as “non-recurring” closing costs. Here is a partial list of expenses those may entail:
- attorney fees
- home inspection
- recording fees
- notary costs
- wire fees
- state, county, or city transfer taxes
- natural hazard disclosures
- title policies
Another type of fee buyers are faced with at closing are “recurring closing costs”. Those are charges that will be due again and again. A few examples of recurring costs are:
- home owner’s insurance
- prepaid interest
- flood insurance (if applicable)
- fire insurance
- pest policies, such as a termite contract
- property taxes
Although discovering the long list of additional expenses that a buyer is expected to cover at closing can be daunting, it pays to become familiar with all of the possibilities. Review what is required in your geographic location and discuss any points that are unclear with your lender, attorney, and real estate agent. No one wants surprises at the time of closing. Be aware also that the GFE is merely an estimate and not an exact figure. Discuss with the appropriate parties which of those expenses is subject to increase. Closing should be a happy, exciting time when buyers open a bottle of champagne, not a box of tissues!
If you have additional questions or would like to speak with a mortgage professional about closing costs or the financing process, don’t hesitate to give us a call at 800-634-8616 or get started online.