Does a Mortgage Loan Cover Closing Costs?

As you put the effort into saving for your down payment, you may also want to budget for closing costs. These are the fees outside of the price of the property that you will need to pay at closing.

Closing costs may, on average, account for up to 5% of what the loan costs. It’s important to understand what is included in the closing costs and who will pay for what.

Typical Closing Costs

  1. Property-Related Closing Costs
    • Property appraisal fees: The lender will require a real estate appraisal to make sure that the market value of the property justifies the quoted purchase price.
    • Home inspection and annual assessments: a home inspection report will reveal any defects or problems in the home, and you can leverage this report to negotiate a better price. You may also need to pay upfront for annual assessments if you buy a home with a homeowners’ association (HOA.)
    • Homeowners’ hazard insurance: A year’s premium is due at closing for flooding, earthquake, and other hazard insurance policies.
    • Property taxes: You will also pay property taxes calculated from the closing date to the end of the tax year.
    • Title search fee: This amount is payable to a title search company that will help research the history of the property you are buying and any title-related disputes or issues.
  2. Closing Costs Related To The Loan
    • Attorney fees and all costs related to the transfer of title such as filing fees.
    • Lender fees including the cost of pulling your credit report.
    • Loan application fee.
    • Loan assumption fee.
    • Loan origination fees.
    • Discount points, commonly known as fees for buying down the interest rate.
    • Prepaid interest.
    • Mortgage broker fee.
  3. Insurance-Related Closing Costs
    • Private Mortgage Insurance (PMI) application fee.
    • Upfront payment for the PMI as opposed to rolling it over into monthly payments.
    • Upfront fees associated with non-conventional loan types such as FHA, USDA, and VA loans.
    • Lender and owner title insurance which protects against title issues such as forged documents and undisclosed liens.

Who Pays Closing Costs on a House?

Most of the closing costs fall on the buyer. Others, such as the commission owed to the real estate agent, are the responsibility of the seller.

With seller concessions, the two parties can divide the closing costs. Seller concessions are fairly common in a buyer’s market as sellers will offer such an arrangement in a bid to make their deal more attractive to buyers. At the end of the day, it all comes down to negotiation.

It is also worth noting that you can negotiate and lower some of these closing costs. The title insurance fee, for example, is open to negotiation.

Paying Closing Costs

With closing fees, you have the option of making a one-time upfront payment out-of-pocket. This option is cost-effective as you don’t have to factor in accrued interests.

Some lenders may allow you to roll some, or even all of these closing costs into the loan, and pay interest on the same through the life of your mortgage.

Within three days of signing and filing your loan application, you will receive a Good Faith Estimate (GFE), highlighting the closing costs you can expect to pay. The final details will be in the closing disclosure that you receive three days before the day of closing.

Buying a home is a big step, so don’t take the home loan process lightly. There are a lot of terms and processes involved that you may be unfamiliar with, and that’s okay! We’re here to help. Contact us today. We’re happy to answer all of your questions you have about financing your new home.

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