When finalizing a real estate transaction, closing costs are an essential consideration. These expenses can significantly impact your financial planning, so it’s crucial to understand what they entail. Closing costs encompass various fees and charges incurred during the finalization of a real estate deal. These costs can be categorized as lender fees and third-party fees. Here is a more detailed breakdown of these common closing costs:
1. Lender Fees
When applicable, these are charges from your mortgage lender for processing and approving your loan:
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Application fee
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Origination fee
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Processing and underwriting fees
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Document preparation fee
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Assumption fee (if applicable)
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Loan-specific fees (e.g., FHA, VA, USDA)
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Discount points (optional)
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Rate lock-in fee (if applicable)
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Private mortgage insurance premium (if applicable)
2. Third-Party Fees
When applicable, these are payments to external service providers involved in the transaction:
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Appraisal fee
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Tax status research fee
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Flood determination certificate fee
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Inspection fees (home, pest, pool, septic, well, roof, etc.)
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Survey fees (if required)
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Title search and report fees
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Lender’s and owner’s title insurance premiums
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Credit report fee
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Attorney fees (if applicable)
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Escrow fees
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Closing Protection Letter fee
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Notary fees
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Homeowners Association (HOA) dues or outstanding assessments (if applicable)
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HOA document and transfer fees
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Courier fees
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Real estate commission/compensation
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Transfer taxes and fees
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Recording fees
Factors Influencing Closing Costs
Several elements can affect the total closing costs, including:
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Location: State, county and city regulations can influence fees and requirements.
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Home Price: Higher-priced homes may incur greater property taxes and title insurance premiums.
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Down Payment: A down payment below 20% can sometimes mean a lender will require you to pay a private mortgage insurance premium at closing.
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Lender Policies: Different lenders have varying fee structures and options.
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Credit Score: A higher score can provide leverage in negotiating better terms.
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Loan Type: Specific loans, like VA or FHA, may have unique fees.
Who Pays What?
Responsibility for closing costs can vary based on location and negotiated terms. Buyers typically cover most closing costs, including lender and third-party fees. Sellers often pay real estate commissions and may agree to cover some buyer costs. Negotiations can shift these responsibilities, so it’s essential to discuss them during the contract phase.
Estimating Your Closing Costs
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Buyers: After applying for a mortgage, you’ll receive a Loan Estimate detailing expected costs.
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Sellers: Real estate agents often provide a net sheet estimating proceeds after expenses.
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Online Tools: Various calculators can provide rough estimates based on inputted data.
Finalizing Closing Costs
At least three business days before closing, you’ll receive a Closing Disclosure outlining the exact costs. Compare this with your initial Loan Estimate or net sheet to identify any discrepancies. Note that while some fees can change, others, like lender fees and transfer taxes, should remain consistent.
Reducing Closing Costs
While many closing costs are fixed, some strategies can help minimize them:
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Negotiate Lender Fees: Some lenders may reduce or waive certain fees.
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Shop Around: Comparing lenders and service providers can lead to better rates.
If you’re uncertain about any closing costs or terms don’t be afraid to speak with your lender so they can clarify fees and provide detailed explanations or speak with your agent about transaction related costs. You can also speak with your CPA/accountant for tax related matters.
Understanding and preparing for closing costs can make your real estate transaction smoother and more predictable. By familiarizing yourself with these expenses, you can budget effectively and avoid unexpected surprises.
