When you are thinking about buying a home, you should understand about the fees that come up at closing, that are involved in any real estate transaction. In some cases, the seller will pay part of the closing costs if you negotiate it as part of the deal and the seller agrees to it. However, there are a few things that almost always have to be paid by the buyer.
The market is changing constantly in the area of which party has to cover the various closing costs. In better economic conditions, sellers might have paid part of the fees out of their equity to work with a buyer who was having a hard time with the down payment. Nowadays, a lot of sellers may not have enough equity. Besides, many potential buyers have had the housing tax credit which can help them make the down payment. When the law takes this credit away, closing costs will again be more of a factor as additional money you as the buyer will need to bring to closing.
Some typical closing costs in a real estate transaction are as follows:
1. Loan origination fees and discount points. A loan origination fee can be anywhere from 0.5% (half a point) to 2% (two points) of the loan amount. It pays for the cost of providing the services associated with making the loan. Discount points, which are a separate thing entirely, are a percentage of the home loan amount (1% per point) paid to buy down the loan rate. This is prepaid interest and it results in lower payments. This can be used as a variable to get you to a level qualifying on an income to debt ratio that lenders use for approval.
2. Title search fees, which run around $200 to $400 to assure clear title; and title insurance policy fees, to get title insurance. Title insurance is designed to defend against all possible claims made on the title created by circumstances that were not known exceptions. This fee is based on a percentage of the price of the real estate. It can vary depending on the title insurance company, but you can estimate a possible 1% of value.
3. The appraisal fee is to do a professional appraisal to validate the worth of the property. This fee is almost always paid by the buyer. It can vary quite a bit, but is normally under $500. Like the credit report, this fee may be paid at the time you put in loan app, or it could be included in come due at closing.
4. The credit report fee is to run your credit reports and is normally under $200. It is normally paid when you fill out your loan application, but is sometimes included at closing. Sometimes, the cost of running the credit report can be included in the mortgage application fee, or they may be listed independently as two fees that can total around $500.
5. Pro-rated property taxes, insurance, association fees and other recurring fees associated with ownership are figured based on the percentage of the year that you as the buyer will have ownership of the home. Usually, you can expect to prepay the first year of insurance, and then your pro-rata share could actually turn out to be a credit that the seller owes you and then you pay the full year’s premium. The difference may also go into escrow accounts, in which case the lender might require one year for final settlement.
6. Recording and document fees. These fees are charged to record the documentation of the new ownership in the county that has jurisdiction. In addition, some states have a document fee or transaction tax, depending on location.
That sums up what the buyer can expect to pay at closing. The seller pays the real estate agent’s commission, the seller share of pro-rated annual costs and taxes, and any other seller costs as agreed in the agreement.
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