When you get a mortgage, you will need to pay closing costs. Closing costs are fees charged by the lender and third parties that are related to your home purchase. In most cases, closing costs are paid at closing by the buyer instead of the seller. With some loans, such as a VA loan, the seller pays a portion of the costs. In some cases, closing costs may be rolled into the mortgage as well.
Closing costs are, on average, 2-5% of the purchase price of the home, or around $2,500 to $5,000.
When you apply for a mortgage, your lender will give you a Good Faith Estimate (GFE), which estimates closing costs on the purchase of the home. This estimate may change by up to 10% before the loan closes. Always compare the GFE to the Hud-1 settlement statement you will receive at closing to compare closing costs. While many fees can legally change by up to 10%, some fees cannot be changed at all.
If the closing costs come in too high, you are allowed to walk away from the loan. Keep in mind many closing costs are also negotiable with the lender, so watch for any fees that are unreasonably high.
What Goes Into Closing Costs?
Closing costs will vary depending on where you live and the home you buy. Common fees in closing costs include:
- Credit report fee
- Loan origination fee, charged by the lender to process the loan paperwork
- Attorney's fees
- Home inspection fee
- Discount points paid in exchange for a lower interest rate
- Appraisal fee
- Survey fee
- Title insurance to protect the lender if the title is not clean
- Title search fees, which covers the check on the title
- Escrow deposit, which pays for some property taxes and private mortgage insurance
- Pest inspection fee
- Recording fee paid to the county or city for the new record
- Underwriting fee for the evaluation of the loan application
Third Party Closing Costs
Many closing costs go to a third party, not the lender, so the lender will have no control over the following fees.
An appraisal is necessary to determine the fair value of a home, and it is typically required by the lender before approving the loan. This is done to ensure the mortgage is not more than the home's value.
Credit report ($15-$30)
The lender will check your credit report before approving you for a mortgage to review your borrowing history. This fee will go to the credit reporting agency, whether it is Experian, Equifax or TransUnion.
Closing fee ($150-$400)
This will be paid to the title company that closes the transaction.
Title search ($150-$400)
This fee is paid to the title company to search property records of the home. The company will check court records, property indexes, prior deeds and more to make sure there are no issues with you taking ownership of the home.
Survey fee ($150-$400)
A survey fee may be necessary to verify boundary lines for the property.
Courier fee ($30)
This is the cost of transporting documents necessary to complete the transaction quickly.
Title insurance ($175-$875)
The Lender's Policy of title insurance protects the lender and assures the mortgage is a valid lien and you own the home.