Closing Costs - Definitions, Expectations, Options

You may understand that a down payment is typically required to purchase a home, but it is also important to set expectations for closing costs as well. Closing costs help pay to set up the loan, many of the costs are the same at most institutions, and these costs can be paid for in a few different ways.

In a nutshell:

It is part of your responsibility as a homebuyer to understand closing costs.

Closing costs are what you pay to close on a home purchase, set up your mortgage, and fill your escrow account. You should expect closing costs to be between 2% and 3% of the purchase price. Sometimes a seller can contribute to cover part, or all of these costs, however even less known is that your lender can potentially give you credits towards closing costs for taking a higher interest rate. 

Definition

The term closing costs can cover a few things, however my definition is: the total upfront costs of a home mortgage. Closing costs in this article are not to be confused with “cash-to-close”, which equals closing costs + down payment + any other fees associated with the purchase. Within closing costs lie two components, hard costs and soft costs. Hard costs refer to the fees of starting a loan (described below), while soft costs pertain to prepaids like homeowner’s insurance and property taxes.

What to Expect

Due to the competitiveness of the mortgage industry, and the requirements set by the government for originating loans, the majority of home loans have very similar, or the same, third party closing costs. You can expect these closing costs to be at least a few thousand dollars when buying a home. The actual figure will vary greatly dependent on the loan amount, homeowner’s insurance rate, and county of the subject property.

Hard Costs

Appraisal – Market valuation of the home

Credit Report – Required for Qualification

Flood Certification – Is the home in a flood zone? If so, flood insurance will need to be purchased.

Lender’s Title Insurance – Read What in Tarnation is Title Insurance?

Settlement Fee – Closing agent’s fee for handling of monies, assisting in signing, and recording tasks.

Courier Fee – Transfer of original signed documents from the closing agent to the bank. 

Recording Fees – Fees set by the county for recording instruments such as the Warranty Deed and Deed of Trust.

Origination Fee – to compensate for the work the lending institution does to start the loan, they may include an origination fee in the form of either a flat rate or a percentage of the loan amount.

Misc. – Depending on the title company, there may be a fee for wire transferring and document download, among others.

Soft Costs

When purchasing a home with less than 20% down, you will be required to utilize an escrow account. This is an account where the homeowner’s insurance and property taxes accumulate over your payments, so when it is time to pay the expenses, the money is available to make payment.

Two Month Cushion - There is a required “cushion” reserve of 2 months which is collected at closing for property taxes and homeowner’s insurance.

Homeowner’s Insurance – Your premium is paid once a year, so a full premium is due at closing. This way the lending institution knows the insurance is active at closing.

Property Taxes – Depending on the county, property taxes are collected a number of times per year. For example, in Spokane County property taxes are collected twice per year. The reserve requirement due at closing will range from 1 – 7 months of property taxes. To ensure that the next due date of property taxes is paid in full, the months of taxes from the last due date to closing date are collected as a part of closing. The months then from the closing date to the next due date are collected in your mortgage payment; the combination of what you paid upfront at closing and what is collected every month up to the due date will be enough to pay the next due property taxes.

Options/Dynamics

Closing costs can be handled in a few different ways. Depending on your plans for staying in the home, and what the market is like when you buy, will determine which options are best for you.

Seller Paid Closing Costs – When you’re in a buyer’s market, you may be able to get some help from the seller in paying a portion, or all, of your closing costs. In a seller’s market however, you will have a tough time getting any of your closing costs paid for you. Depending on the loan you will use to purchase the home, there are percentage limits on the amount a seller can contribute to closing costs.

Lender Paid Closing Costs – If available for your credit profile, you can elect to take a higher interest rate and receive in return credits from the lender to go towards your closing costs. The higher rate you take, the more credits you can receive, up to a maximum interest rate. The amount of lender credits and maximum availability are situation dependent, but it is good to learn about the option ahead of time if you need it.  

Maverick Johnston 
509-230-0768
NMLS ID #1668965