What's Included In Closing Costs?
Closing costs: one of the biggest, but least understood expenses, associated with a residential real estate transaction. Often, buyers and sellers are unsure which party is responsible for paying these, how much they are, and what's included. A probable reason for this confusion is because the answer isn't always the same. While there are certain line items which are part of practically every residential real estate closing, not all are identical. In fact, these differ, not only from lender to lender or title company to title company, but also, from state to state. What's more, local market conditions even play a role in which party pays all, the majority, or part of settlement expenses.
When a local market is red hot, be it a buyers' market or a sellers' market, settlement costs might be "transferred.” For instance, when inventory levels are low and available properties have short listing periods, and, sell for at or even above asking price, it's a sellers' market. Conversely, when inventory levels are saturated, homes linger on the market for extended periods, and typically sell for less than the listing price, it's a buyers' market. In either scenario, one party might opt to pay all the closing costs to sweeten the deal.
What Credit Score is Needed for a Home Loan?
While many home buyers don't think about it, their credit scores have quite a bit to do with their closing costs. The better credit rating a buyer has, the lower the interest rate, and, when combined with a hefty down payment, no need to pay P.M.I. or private mortgage insurance. Since buyers can generally roll settlement costs into the loan, that of course, increases their principal. Buyers with a lower credit rating, and lower down payment, still might qualify for a home loan, but, at a higher interest rate.
When you get a mortgage, you will need to pay closing costs, which are fees – charged by lenders and third parties -- related to the purchase of the home. So, in addition to owing the lender the down payment on the home and the principal and interest related to the mortgage, you will also owe the lender and third parties closing costs, which you usually pay at the time that you close on your mortgage. --Zillow
Buyers might also be required or elect to pay what's known as "points." These are a percentage of the loan, in the form of prepaid interest. Currently, mortgage applicants need a credit score of 650, however, if your score is in the mid to high 700's, you'll have more home loan product options, instead of just FHA and VA loans, you'll probably find conventional to be a better long-term deal. Before applying for a mortgage, you should pull all credit reports from all three bureaus: TransUnion, Experian, and Equifax. If you discover errors, be sure to file disputes by mail, not online because the convenient digital forms are too short to include all necessary information.
What's Included in Closing Costs?
When you are approved for a home loan, and, find a property you like, you'll submit a purchase offer to the seller. If it is accepted, it becomes a legally binding document for both parties. This is why there are a number of "escape" or contingency clauses. One of which states the deal is dependent on securing financing, to complete the transaction. Others are generally the home passing all inspections, the appraisal amount, along with various other stipulations.
The buyer will receive two documents: a Closing Disclosure and the Loan Estimate, these replaced GFE or Good Faith Estimate and HUD-I settlement form, effective August 1, 2015.
All forms are required to be ready three days in advance, as put forth by the Consumer Financial Protection Bureau (CFPB). However, the National Association of Realtors recommends these documents be ready seven days in advance. In these, you'll find the following closing costs:
- Appraisal fee
- Credit report
- Closing fee
- Courier fee
- Origination fee
- Discount points
- Processing fee
- Title search
- Survey fee
- Flood determination
- Life of loan coverage
- Title insurance
- Homeowners insurance
- Recording fee
- Administrative/underwriting fee
- Escrow fee
While this isn't a comprehensive list, these are the most common. Additional fees might be included. Nationwide, settlement costs range between $2,500 to $5,000, or, about 6 percent of an average loan. However, this doesn't mean you'll have to pay what's estimated. Like a lot of things, some of these can be waived, while others can be negotiated. Keep in mind, these fees will also vary in amount, depending on the type of mortgage and which entity conducts the property settlement.
While you likely don't want to put another task on your "to-do" list, it's wise to start shopping around early. You'll be able to compare pricing and services, which can save you money, either over the life of the loan, or even out-of-pocket.