Buyer Closing Costs 101

When a buyer applies for a loan, lenders are required to provide them with a good-faith estimate of their closing costs. The fees listed on the good faith estimate vary according to several factors, including the type of loan applied for and the terms of the purchase agreement. Likewise, some of the closing costs, especially those associated with the loan application, are actually paid in advance. Some typical buyer closing costs include:

Lenders 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 about $350 to $450.
• 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 is usually $200-$300 but can vary as high as $1000.00 or more. It is important to work with your Realtor to find out if a fairly recent survey, acceptable to your lender, of the property 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

• Advance Interest: Lenders will require the buyer to pay interest from the date of settlement to the 1st of the next month. The closer to the end of the month, the smaller this fee.
• Mortgage Insurance Premium: This an insurance premium paid if the buyer buys a property with less than 20% down.
• Hazard/HomeOwner's 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 ( see below under Reserves )
• Reserves Deposited with the Lender

In addition to paying certain items in advance, in Virginia, lenders will require Borrowers to begin escrowing funds to pay certain expenses going forward. Some of these escrows are required by law and some are customary. You will make the initial escrow deposits at closing and then make monthly deposits thereafter. Each year, your lender will require you with 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. Escrow items may include -
▪ Hazard Insurance: usually 2 months is required to be placed in escrow.
▪ Private Mortgage Insurance: If applicable, usually 2 months escrow is required.
▪ 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.

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 but is typically between $250 and $650.
• 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. Average cost of $150.
• 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. Virginia title insurance costs approximately $4.50 per $1,000 of sales price and is a one-time fee paid at settlement.
• Documentary Stamps on the note: this is a fancy way of saying State and Local recording fees or taxes. These vary by municipality, but can be estimated at: $3.50/thousand dollars of the sales price to record the deed ( ownership) and $3.50/thousand to record the deed of trust ( mortgage ).

Your lender must meet certain obligations under the Truth-In-Lending Act. You can learn more about TIL here.

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

Tags: Closing Costs, Mortgages, Lenders