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Closing Costs: What Are They, And How Much Will You Pay?

June 14, 2023 | Posted by: Prime Mortgage Inc.

Closing Costs: What Are They, And How Much Will You Pay?

Your down payment isn't all you need to bring to the closing table when you buy a home. Closing costs are expenses beyond the down payment, such as appraisal fees, attorney fees, and escrow funds, that you pay upon closing.

Many first-time home buyers underestimate just how much they'll need to pay in closing costs. Some buyers may not know there are ways to reduce how much they'll pay.

Closing costs can be a little tricky to understand, so we'll give you an overview of everything you need to know about closing costs before you finalize your loan. We'll also provide a few tips on ways to limit the amount you'll pay.

What Are Closing Costs On A House?

Closing costs are paid at closing for your mortgage. These costs arise through the process of creating your loan. Closing costs cover fees such as those associated with your home appraisal and searches on your home's title. The specific closing costs you'll need to pay depend on the type of loan you take and where you live.

How Much Are Closing Costs?

Closing costs are typically 3% – 6% of the loan amount. This means that if you take out a mortgage worth $200,000, you can expect to add closing costs of about $6,000 – $12,000 to your total cost.

Closing costs don't include your down payment, but you may be able to negotiate them. Just be aware that your negotiating power can depend heavily on the type of market you find yourself in.

Below is a state-by-state breakdown of average closing costs, with and without transfer taxes. These averages are based on the average home price for each state.

Who Pays Closing Costs?

Both buyers and sellers pay closing costs. However, the buyer usually pays most of them. You can negotiate with a seller to help cover closing costs as part of their seller concessions. This can be extremely helpful in making your home purchase more affordable.

Sellers have limits on the amount they can offer toward closing costs. The seller's contribution can only reach a certain percentage of your mortgage value, which varies by loan type, occupancy, and down payment. We've broken this down in the sections below.

Conventional Loans

Below is a breakdown of seller concessions limits for conventional loans. The percentage shown is based on the purchase price or appraised value, whichever is lower.

  • For primary residences:
    • Down payments of 25% or more: 9%
    • Down payments of 10% – 24.99%: 6%
    • Down payments less than 10%: 3%
  • For second homes:
    • Down payments of 25% or more: 9%
    • Down payments of 10% – 24.99%: 6%
  • For an investment property, the maximum amount of seller concessions for any down payment is 2%.

FHA Loans

FHA loans are much more straightforward, and the contribution limit is 6% based on the lesser of the appraised value or sales price.

VA Loans

For VA loans, the seller can pay all closing costs and up to 4% of concessions.

USDA Loans

The USDA loan program allows for concessions from the seller up to 6% of the loan amount.

Common Closing Costs

Here are some common closing costs you might encounter:

  1. Application Fee
  2. Appraisal Fee
  3. Attorney Fees
  4. Closing Fee
  5. Courier Fee
  6. Credit Reporting Fee
  7. Discount Points
  8. Escrow Funds
  9. FHA Mortgage Insurance
  10. Flood Certification Fee
  11. Homeowners Association Transfer Fee
  12. Homeowners Insurance
  13. Loan Origination Fee
  14. Lender's Title Insurance
  15. Lead-Based Paint Inspection
  16. Owner's Title Insurance
  17. Pest Inspection Fee
  18. Prepaid Daily Interest Charges
  19. Private Mortgage Insurance (PMI)
  20. Property Tax
  21. Recording Fee
  22. Survey Fee
  23. Title Search Fees
  24. Transfer Tax
  25. VA Funding Fee

Remember that the specific amount you'll pay for closing costs can vary depending on factors such as your lender, loan type, and location. Make sure to review your Closing Disclosure, a document provided by your lender at least three business days before the closing meeting, which lists all the closing costs you need to pay and the amount you owe. This will give you a clear understanding of the specific costs associated with your loan and home purchase.

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