Closing Costs for the Home Buyer Explained
/In my last post I went over the costs of selling your home. Today I'd like to talk about what it costs to purchase a home - beyond the price of the home itself. A good rule of thumb for estimating closing costs is about 3% of the purchase price of the house. So if the house is $100,000 your closing costs will be around $3,000. That amount is in addition to the down payment you will be putting down on the home. Let's itemize out some of these costs to make it easier to understand.
1. Home Inspection
I highly recommend having a home inspection done on the home you are wanting to purchase. An inspector is a neutral 3rd party who will go through and "check under the hood" and "kick the tires" of the house. He will let you know what's good and what may need attention on the home - from a bad roof, to possible foundation issues, to leaking pipes. The typical inspection is around $300-ish. I've seen inspections both higher and lower than that. The price will vary a bit depending upon who you hire and if you want any extras checked - i.e. mold, radon, meth, etc.
2. Appraisal
Your lender will require an appraisal on the home to make sure that it's worth at least the amount they are lending to you. It will also let you know that you are not overpaying for the house. An appraisal will cost between $350-500. You pay this to your lender and they will quote you the amount when they give you the initial Loan Estimate. Some lenders will have you pay for it before the appraiser goes to the property and others will include it in your final charges when the loan closes.
3. Loan Fees
The fees charged by your lender will be the largest portion of the 3%. They include loan origination fees (usually 1% of the purchase price), credit check fees, flood insurance check fees, etc. There will also be daily interest charges from the day you close to the end of that same month. All of these fees will be quoted to you at the very beginning of the process by your loan officer. She will give you a Loan Estimate that will itemize out those amounts.
4. Home Owners Insurance
You will pay for the first year of Home Owners Insurance at the time of closing of the home. You get to choose the insurance company you use and shop for the best coverage and rate. My own insurance is about $600 a year.
5. Title Insurance & Fees
The lender will also require you to purchase a Lender's Title Insurance policy that protects the lender if a problem with the title crops up at anytime. The seller will purchase one for you as well. That one is more expensive and expansive than the one you will buy for the lender. The one the seller buys is about .5% of the purchase price. The one you will buy is less than that. I know the amount is set by law and based on the purchase price, but I'm not sure exactly how it's calculated.
In addition to the Title Insurance there will also be title fees for the document preparation, deed recording, etc. That is around $275 at my preferred title company.
6. Taxes
I spoke more about property taxes in my blog on Seller Closing Costs. Most often, the seller credits the buyer for his portion of the property taxes at closing. The only time it goes the other way is in November and December. If you buy a house after the year's taxes have been paid, you will credit the seller the taxes for the days you will own the house for the rest of the current year.
7. HOA Charges
If you are buying a home, townhouse, or condo that is part of a Home Owner's Association (HOA) you will credit the seller some HOA dues at closing. A seller typically pays for a month's worth of dues at the beginning of the month. If you close on the 15th of the month, you are responsible for the dues for the last half of the month. That will show up as a closing cost to you on the Closing Disclosure when you go in to sign all your documents.
HOA's also often charge a transfer fee when a property changes ownership. According to Utah's Real Estate Purchase Contract the buyer is responsible to pay that fee. These fees vary significantly from HOA to HOA. I've seen them as low as $75 and higher than $1000. Part of your Due Diligence in buying in an HOA is looking into these types of charges. If the fee is a really high one it is possible to negotiate for the seller to help pay for that fee.
8. Can a Seller Pay My Closing Costs?
Those are the main items that will come up for closing costs when you are buying a home. It is possible here in Salt Lake for buyers to ask sellers to pay for all or part of their closing costs. It's most common when buyers don't have the cash for both a down payment and the closing costs. It does usually mean that you may pay a little more for a house than you would if you paid your own closing costs. If a seller pays your closing costs, that takes away from the profit he gets on the sale of his home. This is definitely something that comes up and can be a negotiating point. If you are competing with other offers, the request could weaken your offer. I have discussions on the pros and cons of making this request with my clients all the time.
If you have questions about any of this or if you or anyone you know has any Real Estate needs let me know. I'm happy to help.
