Many homebuyers today are offering well over the asking price to secure the home of their dreams, but according to one study from Qualia, 44% of recent homebuyers said the final transaction costs were higher than anticipated.
To help buyers better understand all the money they’ll be spending to get into their new home, we’ll explain some of the typical closing fees in a real estate transaction.
In 2020, the average closing costs without taxes came to $3,470, according to ClosingCorp data. With taxes, the amount rose to $6,087.
There are a few factors that impact the price tag of closing costs.
The final amount is a percentage of the total loan amount (usually around 2-5%), so as the final sale prices of homes continue to rise, that number will likely increase too. Where you buy your home can also affect both the percentage and total closing costs. With an average home sales price of $222,394, Missouri has the lowest percentage and total fees with only .71% and an average total of $1,571.
By contrast, Colorado has the second-lowest percentage of fees at .79%, but with an average home price of $464,373, the final total cost is more than double of Missouri homebuyers — $3,658.59.
Meanwhile, Delaware is one of the most affordable markets for homebuyers, with an average home price of $300,604, but it also has the highest percentage of closing fees at 5.9%. The average total is a whopping $17,727.42!
So who pays for all that?
It all starts with the contract
Before you get to the closing table, you have to write up your offer to the seller. Each closing cost item corresponds to some essential administrative or due diligence task that must be completed by the lender, title company, real estate agent, recording jurisdiction, or other third parties. The real estate contract will outline all closing costs, and who (either buyer or seller) will pay for each.
Typically, a buyer can expect to pay for all fees related to:
- The loan origination
- Recording fees
- Land surveys
- Credit reports
- Home warranties
- Title insurance endorsements
- Municipal lien search
- Buyer’s Courier/wire fees
- And more
Sellers may except to pay for:
- Deed stamps
- The title search
- Recording of lien releases
- Settlement fees
- Seller’s courier or wire fees
- And more
Each region has a standard real estate contract, and what is customary for the seller to cover may change. As you examine a contract, you may see some overlap in who pays for what, and there’s always room for negotiation, depending on whether it’s a seller’s market or a buyer’s market. When the market slows down, sellers often offer to cover closing costs to attract buyers. When the market heats up, some homebuyers offer to pay all closing costs or waive contingencies like an inspection to win a bidding war.
If you take this approach, beware that there is no lemon law for homes. You can’t return the home if you find issues with the house after closing. Neither home insurance nor title insurance will cover problems that would have been revealed in a home inspection or land survey if you decide to go without one. Consult your real estate agent or, ideally, an attorney before waiving critical elements of due diligence to make sure you understand the potential risks.
Earnest Money Deposit
If your offer is accepted, the first sum of money a buyer puts up is the earnest money deposit. This money is a gesture of good faith to the seller to demonstrate how serious you are about your offer.
It’s delivered to the title company via personal check, certified check, or wire transfer and held in an escrow account once the buyer and seller sign the purchase agreement. Depending on how your contract is written, you may get the money back if the deal doesn’t close or you may not. Be sure to ask your real estate agent about this before submitting the offer and signing the contract.
In some cases, the earnest money may apply to the final down payment or closing costs.
After the contract is signed and the earnest money has been deposited, the lender, the title company, and other third-party professionals get to work. The final tally of closing costs you’ll owe will be listed on a five-page document called a Closing Disclosure. Here are some of the common line items you’ll see.
Lender Fees Due at Closing
Lender fees are all the costs related to processing your application, conducting all the research needed to underwrite the loan, and finalizing your final loan amount. This money goes directly to the lender.
Credit Report Fee
Most homebuyers begin their journey with a pre-approval from a lender. To determine the loan amount and interest rate, lenders will make a hard inquiry on your credit. This report fee ranges from $30 to $50 per report.
Document Preparation Fee
After applying for a mortgage and receiving approval, the lender sends the homebuyer a three-pate form called a Loan Estimate. Preparing this document and others requires administrative time, so buyers may be charged anywhere from $50 to $100 for drawing up these documents.
Sometimes the credit report fee and document preparation fees are wrapped up in an application fee. The fees can vary depending on the lender, how manual their approval process is, and the amount of work it takes to process the loan application.
Loan Origination Fee
The loan origination fee (also known as an underwriting, processing, or administrative fee) is likely to be the biggest ticket item on your Closing Disclosure. Homebuyers should expect to pay somewhere between .5% and 1% of the loan amount.
So, with the average sale price at $374,900, that’s 1,874.50 – 3,749 for the loan origination fee.
This fee covers the process of evaluating the borrower’s trustworthiness, examining financial statements, preparing documents, and finalizing the terms of the loan. It may also include notary fees and the lender’s attorney fees.
Title Company and Attorney Fees Due at Closing
The title company also charges buyers and sellers fees for their work related to issuing the lender and homeowner’s title policy. Here are the title-related closing costs you’ll likely see on a Closing Disclosure.
Some states require an attorney to oversee the closing of a real estate transaction. The final amount you pay will depend on the number of hours the attorney works.
The Title Search Fee
The title company performs a search on the home’s title to see if there are any outstanding debts or liens on the property and that the seller is the current owner with the authority to sell the home. Title agents resolve ownership issues called title defects before closing or the seller pays off the debt with the proceeds of the sale.
When the title search is complete and all potential problems are resolved, the property is clear to close.
Lender’s Title Insurance
Lenders require title insurance to protect their lien priority and claim to the property should the borrower default on the loan or if another party claims an interest in the property. The insurance policy is valid until the loan is paid off.
Owner’s Title Insurance
A homebuyer isn’t required to purchase their own title insurance policy, but it’s highly encouraged. Without it, a new homeowner will be left to defend against title claims alone. The policy provides a legal defense or pays out money if an ownership error is discovered or a lien is found after closing. The coverage lasts for as long as you own the property.
The cost for title insurance varies from state and fluctuates depending on the sales price of the home. Some states have fixed prices for premiums, meaning you won’t be able to shop around for a better deal. Other states don’t set specific costs for title insurance premiums.
In Iowa, the state underwrites the insurance, resulting in the lowest title insurance premiums in the United States: $110 for properties up to $500,000! Elsewhere, the buyer or seller is likely to pay about the same percentage as the origination fee: .5% to 1% of the purchase price.
If you’re purchasing both the lender and homeowner policy from the same title company, a discount is usually applied, called a simultaneous issue discount. Credits or rebates from the title company will be listed on page 3 of the Closing Disclosure.
Third-party Fees Listed on the Closing Disclosure
These fees cover other professional services required to secure a loan, buy endorsements for your title insurance policy, and provide homebuyers the information needed to decide if the house is a worthwhile investment. You’ll see this information on the second page of the Closing Disclosure.
Lenders require an appraisal to calculate the loan-to-value ratio, a valuable metric used in determining the risk of your loan, but it must be conducted by an independent third party. A homebuyer can’t shop around for an appraiser. Instead, strict regulations require lenders to order appraisals through specialized companies or management firms.
The appraisal fee is a flat cost that ranges from $300-500, but it can vary based on the home’s location, property type, and loan type. If more extensive research is needed because the appraiser lacks comparable properties or there are other unusual circumstances, the price may increase.
Most lenders don’t require a homebuyer to obtain a home inspection, but, like the homeowner’s title insurance, it’s highly recommended. Since it’s up to the buyer, it’s a good idea to shop around for quotes to get the best deal. You may also want to consider additional inspections or testing for pests, mold, and lead, depending on the home’s location and age.
The national average for a general inspection ranges from $279-400, but if you have an inspection contingency in your contract, it can save you from buying a money pit.
Land surveys aren’t usually required but provide valuable information for homebuyers. Natural boundaries and fences can be deceiving, but a survey provides certainty. A survey is usually required by a title company if you want to add boundary endorsements to your title insurance policy. There are different types of surveys depending on what you need the intended use of the survey, so make sure you obtain the right one.
Buyers have the option to shop around for quotes on a survey and save some money. The cost of a survey ranges from $200 – $1000.
HOA Estoppel Letter
If the property is governed by a community association like an HOA or COA, there’s also a fee for a report from the association showing the dues amount, if the current owner has any outstanding dues, code violations, and if there are any HOA liens. The report is usually called an HOA estoppel letter, HOA certificate, Demand Letter, or Resale Package.
The HOA letter or estoppel is usually a seller’s cost.
Taxes, Prepaid Items, and other Government Fees
These are listed on the second page of the Closing Disclosure as well. With the exception of the mortgage insurance premiums, these “Other Costs” are fees you would pay even if you weren’t financing the purchase with a loan. You’ll note that the cost associated with your homeowner’s title insurance policy and any HOA fees due upfront, like Capital Contributions, are listed here.
Any time a property transfers ownership, important chain of title documents like the deed must be executed and recorded in the public record. Recording jurisdictions charge a one-time fee to process these documents.
Depending on where you buy your home, the city, county, and state may charge a tax based on the percentage of the sale price. Some states, like Texas, have no transfer tax.
Upcoming property taxes are typically prorated based on occupancy and estimated costs, and a seller’s credit is provided to the buyer at closing. The buyer then pays for the full year when the tax bill is issued.
Additionally, lenders will ask buyers to pay some taxes upfront to add to your escrow account. This account is created at closing to pay property taxes, homeowner’s insurance, flood insurance, and more. This money you pay at closing ensures the account is starting at a surplus, giving borrowers and lenders a cushion should a monthly payment be missed or late.
Tax collectors who go unpaid can place a lien on the property that supersedes the mortgage, so lenders want to have as much control over tax payments as possible. Otherwise, they risk losing their lien priority, meaning they won’t get paid first after foreclosure is the borrower defaults on the loan.
Most lenders want buyers to pay for the premium and one year’s worth of homeowner’s insurance prior to or at closing. Again, these pre-payments will be added to your escrow account.
Mortgage Insurance Premium
If your down payment is less than 20% of the loan amount, you’ll have to pay private mortgage insurance (PMI). This is one of the three most common types of insurance related to homebuying. Lenders prefer if homebuyers put up a greater stake when initially purchasing a home, but not everyone can afford to save that much for a down payment. The compromise is PMI.
The premium and monthly costs will be listed in the Closing Disclosure under Other Costs and Prepaids, but it benefits the lender. This insurance will be wrapped up in your monthly payment until you pay off 20% of the home’s original value. To cancel the PMI, you’ll have to contact the mortgage servicer.
Tips for Reading the Closing Disclosure
Before you receive your Closing Disclosure, your lender will send you another document called a Loan Estimate. The amounts on these documents should match, so if there are any changes, contact your lender. All these costs will be listed on the closing disclosure, but sometimes the discounts and credits can be confusing for consumers.
Follow these tips to prepare for your closing:
- Carefully review this document ahead of the closing.
- Request a copy of the closing packet from your closing agent if you don’t receive it within 3 days before closing.
- If you notice any inaccurate contact information or misspellings, alert the lender immediately.
- If you have any questions about the fees, call your loan officer or title agent as soon as possible.
Real estate can be complicated and vary from state to state, so you may see some costs on your Closing Disclosure that aren’t listed here. Use this interactive tool from the Consumer Financial Protection Bureau to get more details.