Closing costs are fees paid at the closing by seller or buyer after a real estate transaction. It happens when a title of a property is transferred to the buyer. The fees are related to home purchase and home loan (FHA, VA Loan, Conventional loan, USDA / RHS Loans or Jumbo vs. Conforming Loan).
Estimate of closing costs is required when the creditor/loan originator receives an application containing
- Borrower’s name
- Borrower’s income
- Borrower’s social security number
- Property address
- Estimated property value
- Requested amount of mortgage loan
Good Faith Estimate & Loan Estimate Revisions
Creditor may not revise an estimate because of
- technical issues
- incorrect calculations
- low estimate
They can also revise the estimate if changing circumstances:
- If the closing costs increased (interest rate on an unlocked loan)
- Value of property changed (storm damage or lien recorded)
- Negative borrower’s ability to qualify for the loan (got fired, documents prove less income)
- Borrower waits more than 10 business days to indicate an Intent to Proceed.
- If the settlement is delayed for more than 60 days for a new construction loan if the original Loan Estimate includes the statement that the estiamte can be revised for this reason.
When reissuing an estimate lender needs to stick with those timeframes
- Delivered within 3 days with a new information that has been required to reissuance.
- Needs to be delivered before closing.
- 4 days before a loan consummation (mailed at least 7 days prior). Business day is everyday but Sunday and federal holidays.
Closing Costs Estimates Tolerance Levels
They are grouped in a 3 categories with 3 different corresponding tolerance levels.
GFE/HUD-1 tolerance are as follows:
- Real estate transfer taxes, and creditor’s or mortgage broker’s charges for its own services (loan origination fees and interest rate) have zero variance. They must be identical on GFE and HUD-1.
- Fees identified by lender (credit report, appraisal, government recording fees, title insurance – if selected as “recommended” by a lender). Cannot vary more than 10% on both documents.
- Fees for service that owner choose for themselves (title or hazard insurance). If the borrower doesn’t choose one of the identified by a lender and pre-paid mortgage interest.
Loan Estimate/Closing Disclosure tolerance are as follow:
- Real estate transfer taxes, loan originator fees, interest rate, charges for services provided by affiliate of the creditor or mortgage broker, credit report & appraisal (if the creditor or a mortgage broker doesn’t permit to shop for). They must be identical on the Loan Estimate and Closing Disclosure. They must be identical on the Loan Estimate and Closing Disclosure.
- Fees identified by a lender (government recording fees, title insurance if selected as “recommended” by a lender). Cannot vary for more than 10%.
- Title or hazard insurance – same as above for GFE/HUD-1 tolerance
The borrower needs to receive it at least 3 days before consummation (no Sundays and federal holidays).
If the following items change than a new Closing Disclosure must be provided to the borrower and settlement is delayed for an additional 3 business days.
- Loan product
- Addition of a prepayment penalty
If there are other changes than the borrower has the right to review Closing Disclosure 1 business day before consummation.
Lenders or closing agents prepare the Closing Disclosure. Sellers are permitted to receive a disclosure (costs and credits). They may receive the disclosure when the loan is consummated (no 3 days waiting period here).
If some changes occur than a lender has 30 days to change the payment to a borrower or seller. Non-numeric clerical errors and tolerance violations trigger a new Closing Disclosure that must be delivered within 60 days following loan consumption.
Closing Costs For Seller Case scenario
How to estimate the closing cost? The are based on three major factors
- location where you live
- type of property
- type of loan
Below is a list of fees you may need to pay
- Points – Loan Discount Points, 1 point = 1% of your loan amount. They are pre-paid by the buyer and can be reimbursement by the seller . They reduce usually interest rate by the 1/8%. They work as lump sum payment that lowers your monthly payment. Cost between 0-3% of loan amount
- Attorney/Lawyer Fees – For preparing official documents. Usually hired by both parties. Can cost from $300 – $600.
- Home Inspection/Pest & Lead-Based Paint Inspection – Usually paid by the buyer. The buyer needs to check the condition of the property and make sure it doesn’t require repairs before closing. Some lenders requires the pest/termite inspection (wood destroying pest inspection and allocation of costs) and paint inspection in some states. Lead paint is toxic and hazardous. Home inspection cost from $175 to $350. Pets inspections runs from $60 to $125.
- Owner’s & Lender’s Policy Title Insurance – A borrower usually pays for the insurance. It protects the lender in case of any issues with a title. The second policy is for the owner, it protects you against (errors or omissions in deeds, mistakes in examining records, forgery, undisclosed heirs).
- UPMIP – FHA Up-Front Mortgage Insurance Premium which is 1.7% of the loan size. If you use backed mortgage for a purchase and your loan size is $200,000 then your Upfront MIP will be $3,500. The fee is not paid by cash.
- PMI – Private Mortgage Insurance, typically costs between 0,5%-1% of the loan size. On a loan size $200,000 you need to pay as much as $2,000 a year or $167 per month.
- Mortgage Application Fees – paid by the borrower to the lender. It covers cost of processing the loan. Before paying make sure to ask what the fee covers. Sometimes this cost is negotiable and it covers a credit report and appraisal.
- Home Appraisal – Cost from $300 to $700. For multi level buildings can be more. This is paid to an appraisal company which in some cases needs to be approved by HUD. The appraisal covers the fair market value of the property.
- Survey Fee – Cost from $150 to $400, paid to a survey company for a survey of a lot and all structures on it. The survey also confirms the lot size and dimensions. It’s require by institutional/commercial lenders.
- Flood Determination Fee – Life of Loan Coverage, cost from $15 – $50. The buyer needs to make sure that the property it’s not located in a flood zone. If yes than the buyer needs to buy a flood insurance.
- Exam Fee – Title Company Title Search, the company needs to make sure that nobody has a claim to the property. It usually covers (Chain of Title, Tax Search, Report on Possession, Judgment and Name Search, Commitment).
- VA Funding Fee –
Downpayment Veteran Reservist/National Guard Less than 5% 2,15% 2,40% Less than 5%-10% 1,5% 1,75% Less than 10% or more 1,25% 1,5%
- Credit Report – Fee covering a credit report received from 3 different bureaus (Experian, Equifax and TransUnion). By law, a credit reporting company can charge no more than $12.00 for a credit report.
- Closing Fee – An Escrow Fee, paid to an attorney, escrow company or title company. Calculated a $2.00 per thousand of purchase price plus $250.
- Home Owners Association Transfer Fees – HOA transfer fees usually run anywhere from $100 to $400 with an average HOA transfer fee being around $225 to $250. It’s paid by the buyer to get a copy of the association financial statements, minutes and notices making sure that association dues are paid current.
- Recording Fee – to record and update public land records this fee needs to be paid. (usually charged by city or county).
- Underwriting Fee – cost up to $795, goes to the lender for time spent on checking your loan with guidelines and deciding to approve or not you loan.
- Property Tax (usually 6 months of county property tax). RESPA allows the lender to collect a maximum cushion in months of property tax and two months of hazard insurance at closing as an escrow cushion in case the borrower misses some mortgage payments., or final charges are higher than estimated.
- Transfer Taxes – This is the tax when a real estate transaction is finalized.
- Prepaid Interest – money paid to get interest paid up through the first of the month.
- Origination Fee – Cost 1% of the total loan amount,. If you are not a high risk borrower with a bad credit and undocumented income you can negotiate this fee. There is a lot of mortgage brokers that will not charge you a penny for origination fee.
- Courier Fee – cost of transporting documents.
How To Avoid Paying Closing Cost?
Sometimes the seller will agree to assume the buyer’s closing fees. In many cases (Discount Points, Origination Fees, Underwriting Fees, Application Fees and Appraisal Fee) are not paid or partially paid. There are some mortgage brokers who put all closing cost into loan amount and get you best rate as possible. You can avoid upfront fees by getting a non-closing cost mortgage, in which you don’t pay a penny at closing. However, in most cases this type of “deal” will end up costing you in the long run. The lender will possibly charge you a higher interest rate on the loan amount for not paying closing costs.