✏️ Editor’s Note: Realtor Associations, agents, and MLS’ have started implementing changes related to the NAR’s $418 million settlement. While home-sellers will likely save thousands in commission, compliance and litigation risks have significantly increased for sellers throughout the nation. Learn how NAR’s settlement affects home sellers.
Home buyers are on cloud nine after signing the contract for their dream homes… until they see the closing disclosure. It lists many additional expenses buyers have to bear as “closing costs.”
Home buyers spend $6,905 on average in closing. These are out-of-pocket expenses required to finance, buy, and own a home. Closing fees largely depend on the location and can add up to several thousand dollars in certain areas.
For instance, it costs $29,888 to close on a single-family home in DC. This may come as a shock to first-time home buyers busy saving up for the down payment. As a rule of thumb, expect to pay 2% to 5% of the purchase price in closing costs.
Here’s a comprehensive guide to buyer closing costs. Get an accurate estimate of your closing costs and learn ways to avoid them.
🚀 Key Takeaways
- How Much are a Buyer’s Closing Costs: Closing fees for buyers range between 2% to 5% of the purchase price.
- What Do Buyer Closing Costs Include: Buyer closing Costs consist of one-time expenses of loan origination, notary, recording, and appraisal. It also includes recurring expenses like property taxes and homeowner’s insurance.
- Account for Loan-Specific Closing Costs: These may include PMI for conventional loans, FHA mortgage insurance premiums, VA funding fees, and USDA guarantee fees.
- How to Reduce Closing Expenses: You can ask for seller concessions, shop for lenders, or apply for state-specific closing cost assistance.
What are Closing Costs?
Closing costs are the fees you pay to acquire a mortgage and buy a home. There are three categories of buyer closing costs:
- Property Related Costs: These include the costs to inspect, appraise, and survey the property. Additionally, taxes such as property tax and transfer tax also fall in this category.
- Paperwork Related Costs: These consist of real estate attorney fees, recording fees, notary fees, etc.
- Mortgage Application Costs: This includes the money you spend to finance your new home. Expenses like loan origination fees, application fees, processing fees, etc., come under this category.
For home buyers, closing costs are an out-of-pocket expenditure. You cover them using a cashier’s check or with a wire transfer.
Who Pays Closing Costs?
In most real estate transactions, buyers and sellers share the closing costs. But buyers cover most of them. You can negotiate with the seller for concessions.
Home sellers can offer concessions only up to a certain percentage of the sale value. The seller concessions limit varies per the loan type and is as follows:
» Who Pays Closing Costs: Learn Who Covers the Major Chunk of Closing Costs.
How Much are Closing Costs for Buyers?
Average buyer closing costs are around 2% to 5% of the total purchase price. It includes the cost of financing, property-related costs, and paperwork costs. Not all buyers pay the exact closing costs. Buyer closing costs depend on the property location, lender, type of mortgage, etc.
Buyer closing costs include some expenses independent of the loan type. These include appraisal fees, loan origination fees, underwriting fees, etc.
Under the Real Estate Settlement Procedures Act (RESPA), your lender will provide you with the closing disclosure three days before the settlement date. It will list all your closing costs along with the exact amount you owe.
What is Included in Closing Costs for Buyers?
Here are some of the most common estimated buyer closing costs:
Loan Application Fee: Up to $500
The application fee is the upfront fee the mortgage lender charges when you submit your loan application. It is non-refundable and varies across lenders.
Some lenders collect the application fee as a deposit for closing costs, while others charge it separately. Sometimes, loan application fees can be as high as $500.
Loan Origination Fee: 0.5% to 1% of the Mortgage Value
The loan origination fee includes the cost of processing, underwriting, and funding your loan. It forms the biggest chunk of the mortgage closing costs for buyers. Prepare to pay up to 1% of the loan value in the origination fee.
You might see other loan origination charges in the loan estimate if you have prepaid interest points with your loan.
Home Appraisal Fee: $300 to $450
Mortgage lenders require buyers to get the property appraised. A home appraisal helps determine the fair market value and ensures you don’t overpay for the property.
Home appraisal costs range between $313 – $422. The price band varies per the size and the type of property.
Real Estate Attorney Fee: $150 to $400 Per Hour
In some states, you cannot close the sale without a real estate attorney. You may also hire an attorney to draft a contract or other paperwork.
Real estate attorneys charge hourly rates or work on a fixed fee basis. The hourly rate of a real estate lawyer may range between $150 and $400.
Closing Fee: Varies
Designated settlement agents handle the closing process in different states. Usually, an escrow agent, a real estate attorney, or a title company acts as a closing agent. The closing fee varies across states and depends on who signs off the closing.
Courier Fee: $30 to $50
Your lender might charge $30 to $50 to transport the mortgage documents to and from various parties involved in the transaction.
Credit Report Fee: $10 to $100
The credit reporting fee is the cost of obtaining a credit report. You allow lenders to access your credit report during the credit score verification. They review the credit report via one of the three credit bureaus – Experian, TransUnion, or Equifax.
These bureaus charge a monthly premium to access credit reports which lenders roll into buyer closing costs.
Title Related Costs: 1% to 1.2% of the Purchase Price
There are three types of title costs which are as follows:
- Title Search Fee: A title search helps discover any liens or claims on the property that the seller may be unaware of. You need to hire a title company to examine public records like deeds, tax liens, land records, court judgments, etc. The title search fee ranges between $60 to $200 depending on the property location.
- Lender’s Title Insurance: Lender’s title insurance protects the lender’s investment in case of title disputes. Unlike other insurances, you need to pay only once for the lender’s title insurance at closing. Lenders’ title insurance typically costs 0.5% to 1% of the mortgage.
- Homeowner’s Title Insurance: A homeowner’s title insurance safeguards the buyer against title disputes. Owner’s title insurance is not mandatory but highly recommended. In some areas, sellers pay for the owner’s title policy, by convention. The owner’s title policy typically costs 0.4% – 0.5% of the purchase price.
Title search fee combined with title insurance costs about 1% to 1.2% of the total purchase price.
Discount Points: 1% of the Mortgage Value
You can lower your mortgage’s interest rate by purchasing discount points from the lender. Unlike other buyer closing costs, discount points are optional.
One discount point is equal to 1% of the loan value. For instance, one discount would cost you $1,000 for a mortgage of $100,000.
Escrow Funds: At Least 2 Months of Mortgage Payments
Lenders may establish a mortgage escrow account to pay the property tax and insurance premiums. Escrow funds are a part of your monthly mortgage payments. Your lender manages the escrow funds and makes the payment on your behalf.
Most lenders require home buyers to keep at least two months’ worth of mortgage payments in the escrow funds.
Prepaid Interest: Depends on the Mortgage Rate
It covers the mortgage interest from the date of closing to the first monthly mortgage payment. To calculate the prepaid interest rate, divide the annual interest rate by 365. Then multiply it by the number of days between closing and the first mortgage payment.
Property Tax: Depends on the Home Value
The local authorities charge property tax to fund community projects. The property tax rate is calculated based on home value and local taxation laws. It is a part of the monthly mortgage payments.
Transfer Tax: Depends on the Property Value
Transfer tax is levied on the transfer of homeownership from the seller to you. The municipality, county, or state is responsible for charging this tax, and its amount is based on the property’s market value.
Home Inspection Fee: $100 to $500
Your lender might require the home inspection report to ensure the property is free of structural problems. You might also have to conduct various specialized home inspections, such as pest inspection, lead-based paint inspection, radon inspection, etc.
A general home inspection costs $100 to $500. Specialty home inspections can cost an additional $25 to $500.
Homeowners Insurance: Depends on the Property Value
Lenders generally require you to purchase homeowner insurance to protect their investment. Homeowner’s insurance premiums are usually a part of the escrow funds.
The monthly premiums depend on the insurance provider, home value, and the coverage you choose. Home insurance costs are usually rolled into the monthly mortgage payments.
Recording Fee: $120 to $150
A recording fee is paid to the local city or county to update the ownership records. The recording fee varies by county and typically ranges between $120 and $150.
Additional Buyer Closing Costs Per the Loan Type
You might have to bear some additional buyer closing costs if you opt for a specific type of loan. These may include the following:
PMI for Conventional Mortgages: 0.5% to 1% of the Loan Amount
Private Mortgage Insurance (PMI) protects the lender if the buyer fails to make mortgage payments. You need a PMI for a conventional loan if you make a downpayment lower than 20% of the purchase value.
The PMI rates vary depending on your monthly mortgage payment and down payment. However, it is typically around 0.5% – 1% of your loan amount.
FHA Mortgage Insurance Premiums: 1.75% of the Loan Amount
FHA loans require borrowers to buy Mortgage Insurance Premiums (MIP) if their downpayment is less than 20%. Additionally, you pay FHA MIPs that vary based on the Loan-To-Value (LTV) ratio and mortgage duration.
VA Funding Fee: 1.25% to 2.15% of the Mortgage Amount
VA funding fee is a one-time payment that borrowers pay to the Department of Veterans Affairs. It makes VA loans affordable for veterans. VA funding fee rates are between 1.25% to 2.15% of the mortgage value, depending on the down payments. The rates can vary if it’s your second VA loan.
» VA Loan Closing Costs: Read to know more.
USDA Guarantee Fee: 1% of the Loan Amount
The mortgage lenders have to pay a non-refundable upfront guarantee fee that buyers cover indirectly in the closing costs. The USDA guarantee fee is 1% of the loan amount. You must also pay an annual fee of 0.35% of your mortgage.
How to Calculate Closing Costs for Buyers?
Home buyers can expect to pay 2% to 5% in closing costs. However, to get more accurate estimates, enter your home’s purchase price and select the state in the buyer closing costs calculator given below:
How to Avoid Paying Closing Costs When Buying a House?
There is no way to waive home-buying closing costs completely. However, here are some tips that can bring down your buyer closing cost estimates:
- Ask for Seller Concessions: You can ask the seller to contribute to your closing costs through concessions or credits. However, the percentage of seller concession varies per the mortgage type.
- Shop for Mortgage Lenders: Research mortgage lenders and compare their rates. Choose a lender that has a lower mortgage cost and offers competitive rates for the loan of your choice.
- Research Closing Costs Assitance Programs: There are grants to assist buyers with government loan closing costs. Typically, local or state housing authorities or nonprofits offer these grants. Research the eligibility criteria for each type of grant before you apply.
Bottom Line
The closing cost percentage for buyers accounts for 2% to 5% of the total purchase price. The exact closing costs depend on the type of loan, estimated home value, sale contingencies, and local laws.
You can ask for seller credits or concessions, negotiate with your lender or opt for a mortgage with no closing costs. You can also apply for state-sponsored closing costs assistance programs.
Ensure you account for the closing amount while you are busy saving up for the downpayment. Review the closing disclosure to know the exact closing estimates. Apart from funds, review and bring all the documents needed at closing.
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Frequently Asked Questions
1. Is the down payment included in closing costs?
No, a down payment is not included in the closing costs. However, you can negotiate with your lender. Some lenders bundle all the funds and call it “cash due at closing.” This includes both the down payment and the closing costs.
2. How much are closing costs and realtor fees for buyers?
Typical closing costs for buyers range between 2% to 5% of the purchase price. It varies depending on the loan type, home value, and location of the property you are buying. Buyer’s Realtor fees are usually around 2.5% to 3% of the home sale value. However, home sellers cover the buyer’s Realtor fees and are not part of the buyer’s closing costs.
3. How to reduce closing costs when buying a house?
Here are the ways to reduce closing costs when buying a house:
1. Request seller concessions
2. Opt for no closing cost mortgage
3. Apply for closing costs grants
4. What is the largest closing expense for the buyer?
The loan origination fee is the largest closing expense for home buyers. Mortgage lenders charge 0.5% to 1% of the loan amount to process, underwrite, and fund your loan.
5. How much are closing costs for a buyer paying cash?
Closing costs for cash buyers range between 2% to 5% of the purchase value. When you buy a house with cash, you need not cover the mortgage-related closing costs. Also, there is no appraisal, so you are not on the hook to cover the home appraisal fee.
6. How to estimate closing costs when buying a house?
As a rule of thumb, account for 2% to 5% in closing costs when buying a home. You can use closing cost calculator for buyers available online to get more detailed and accurate estimates.
Average Closing Costs for Buyers Per the State
Click on your state to know buyer closing costs in your area:
| Region | Closing Costs for Buyers |
|---|---|
| Northeast | Connecticut | Massachusetts | New Hampshire | New Jersey | New York | Pennsylvania | Rhode Island | Vermont | Delaware | Maine |
| Midwest | Illinois | Indiana | Iowa | Kansas | Michigan | Minnesota | Missouri | Nebraska | North Dakota | Ohio | South Dakota | Wisconsin |
| South | Alabama | Arkansas | Florida | Georgia | Kentucky | Louisiana | Maryland | Mississippi | North Carolina | Oklahoma | South Carolina | Tennessee | Virginia | Texas | Washington, D.C. | West Virginia |
| West | Alaska | Arizona | California | Colorado | Hawaii | Idaho | Montana | Nevada | New Mexico | Oregon | Utah | Washington | Wyoming |
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