One subject that may be confusing to a first time homebuyer is that of closing costs. How much does it cost to close on a house, and who pays for what? And most importantly, what’s included in these costs? The truth is, closing costs are not really that complicated, and the process is fairly easy to understand. The following are some of the different types of costs that may be required to close on a home.
Depending on the type of mortgage the buyer obtains, an origination fee may be included in the closing costs. The buyer normally pays this amount, and it is a percentage of the amount financed.
Some mortgage loans require the buyer to pay discount points in order to get a better interest rate on the loan. A point equals 1% of the amount of the loan, and in most cases, the annual percentage rate will decrease by .125% for each point purchased. Paying points may or may not be a good idea for the buyer, depending on how long he/she plans on owning the house.
Banks most always require an appraisal before issuing a mortgage loan, and to send an appraiser out to the house requires an appraisal fee. Normally, the buyer pays this cost since the appraisal is for the buyer’s bank.
Credit Report Fee
Buyers usually have to pay a credit report fee to the bank to obtain approval for a mortgage.
This charge is paid by the buyer if a home inspection is desired. A clause can be put into the offer letter that allows the buyer to rescind it if he/she is unhappy in any way with the results of the inspection or the lack of remedy provided by the seller for any problems that turn up during the inspection.
Bank Processing Fee
This fee is often charged by the bank to the buyer as an add-on to recoup its costs for processing the loan.
Flood Certification Fee
Buyers pay this fee to the bank in order to determine whether the home is in a flood zone.
A hazard insurance premium is usually due at closing by the buyer to protect the lien-holder and buyer against things such as storms and fire. If the home is determined to be in a flood zone, the buyer will also have to purchase flood insurance as well.
Depending on the closing date, the due date for the buyer’s first mortgage payment may be almost 2 months away because of the timing of the bank’s normal cycle of charging interest. Because of this, the bank will charge the buyer the interest upfront for the first partial month before the bank’s interest cycle resets.
The Title Company will usually charge a settlement fee to cover its costs to transfer the title from the seller to the buyer.
A title insurance policy is usually required to protect the buyer and the lender in case problems are found with the title of the house during the buying process. If major problems such as property disputes or lawsuits are found, this insurance policy is in place to protect the buying parties.
It’s important to remember that although the buyer typically pays for all of these closing costs listed, nothing is set in stone. Sometimes the buyer will negotiate for the seller to pay for some or all of these costs. In a good buyer’s market, negotiating closing costs into the deal is often a common practice that is well taken advantage of. However, in markets where multiple bids are coming in on houses and they are going for list price, there is virtually no chance of getting the seller to pay any closing costs. It just depends on the situation and the housing market at the time of the transfer.