Many home buyers, especially first time buyers, make the mistake of underestimating their closing costs. Often times, buyers calculate the down-payment associated with the loan type only i.e. FHA is 3.5% of the purchase price, Conventional starts at 5%, and VA and USDA are 0%. However, the down-payment is completely separate of the closing costs or settlement charges.
Using a rule of thumb estimate of 2% to 5% is the fastest yet least accurate way to make an educated guess at the closing costs. So let’s assume the buyer has found a $200,000 home in Fort Bend and decides to use an FHA loan at 3.5% down. Also, assuming the buyer is paying all their share of the closing costs, then to be safe another (estimated) 3.5% for closing should be set aside along with the down-payment. So in this example, FHA requires $7,000 down and the settlement fees will be around $7,000 for a total of $14,000 due at the closing table.
To obtain a more accurate estimate of the settlement fees the help of the lender is needed. Within 3 days of the buyer’s completed loan application a Good Faith Estimate (GFE) should be obtained from the lender. This paperwork will describe to you the closing costs associated with your loan, ranging from lender-related fees (such as loan origination fees) to outsiders’ fees required to complete your transaction (survey, appraisal, attorney fees, etc.). The GFE is still just an estimate and can slightly change, however, in 2010, the government made it illegal for some of those costs to rise and capped other cost increases at no higher than 10 percent.
Below is an example of the typical charges seen on the settlement statement or HUD-1 at closing. The HUD-1 is required to be delivered 24 hours before closing so that both the buyers and sellers can analyze before showing up to the closing table. Two items not listed below are the option fee and the earnest money since they are paid before closing when the offer is made. The option fee is paid to allow an exit from the contract during a specified time and the earnest money is used to show good faith of purchase from the buyer to the seller. Both these items will normally show up as a credit to the buyer at closing.
|Points||These are fees lenders demand upfront in exchange for a lower rate, with each point equaling 1% of the mortgage value. As a general rule, the more points a buyer pays up front, the lower the interest rate on the mortgage.|
|Application / credit fee||Nearly half of lenders will charge an application and credit check fee or include it in the origination costs.|
|Upfront Mortgage Insurance||Typically this is charged for any type of loan with under 20% in equity (or 20% down). This insures the mortgage lender in case of a default by the buyer and is one of the higher costs in the settlement. This range from 1% to 2%|
|Origination / Underwriting Fee||Often this varies from lender to lender and is the fee charged to open up the loan. It can include some of the other fees listed below e.g. lender’s attorney fee, appraisal, etc. It too is one of the higher costs associated with closing and is normally around 1 to 2%.|
|Lender’s attorney fee||If you make some noise, the lending officer may drop this fee.|
|Escrow and Prorated Costs||The transfer of the deed requires other costs such as county / city taxes, HOA fees, and home owners insurance to be paid off for the year or transferred to the buyer.|
|Title Search / Insurance||Even if the title search comes up clean, a lender will often require insurance to guarantee that the title is clean and insure the buyer against claims on the deed that might arise.|
|Appraisal fee||Your lender will want a statement of your property’s value from an independent appraiser. This fee is normally between $300 to 500 depending on the size of the property.|
|Inspections / Survey||Some lenders may require that your property is inspected by an independent, certified inspector and also surveyed, which could cost another $300 to $600 depending on the size of the property and the loan type.|
|Seller Contribution to Closing||This is a credit not a cost but was very typical during a buyer’s market but in a seller’s market this gets harder to negotiate. This is the negotiated amount between the buyer and seller in which the seller uses their equity to contribute to the buyer’s closing costs.|
|Documentation preparation||Technically, this covers the preparation of the final legal papers. It’s a junk fee if other paperwork fees exist also.|
See a more in-depth description of all fees by clicking here.
Or for a quick calculator to get an estimate click here.