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Understanding Closing Costs
First Time Home Buyer Information and Advice

See also Who Pays For What - Buyer and Seller Costs

You can generally break down all closing costs into two basic groups:

  • Amounts paid to state and local governments. These include city, county and state transfer taxes, recordation fees, and prepaid property taxes.
  • Costs of obtaining a loan or mortgage. These fees include title insurance, appraisals, credit checks, loan origination and documentation fees, commitment and processing fees, hazard and mortgage insurance and interest prepayments.

There are plenty of fees that you’ll have to pay during the closing. Many of these costs are actually negotiated during the offer and counter offer process. All closing costs are spelled out in the lender’s Good Faith Estimate. If you want to make sure you are paying the least amount possible in closing cost fees, you should get at least three Good Faith Estimates from mortgage lenders. This is only an estimate and the actual charges may differ. RESPA allows the borrower to request to see the HUD-1 Settlement Statement that shows all actual charges imposed on borrower in connection with the settlement one day before the settlement. If you see a charge that doesn’t make sense, or that no other lender has, it’s time to ask questions.

Here’s an example of what you can expect to pay (some costs vary widely from state to state, so you should determine exactly what you will have to pay) :

Property Inspection - We strongly recommend that every home has a physical inspection done during the escrow period. A qualified inspector can find many potential problems early in the process which allows you to request repairs, request a credit, obtain further specific inspections, or even back out of the deal. Inspections generally run between $275 and $450 depending on the size of the home.

Discount and Origination Points:

Points are equal to a percent of the loan amount. 1.00 point is equal to 1.00% of the loan amount. Discount points represent additional money you can pay to the lender at closing. If you pay more points it will lower the interest rate. Usually, for each point you pay for a 30-year loan, your interest rate is reduced by about 1/8th (or .125) of a percentage point. Paying points can be good if you plan on living in the home for a long time.

Origination Points (or Loan origination fee) charged by the lender for evaluating, preparing, and submitting a proposed mortgage loan. Origination fees are often expressed as a percentage. A one percent loan origination fee is equal to 1% of the loan amount. Some lenders add origination points into their quoted points while other lenders add an origination point in addition to their quoted points.

Application Fee covers the lender’s cost to process the information on your loan. Usually, you must pay this charge at the time you file the application. Some lenders may apply the cost of the application fee to certain closing costs. Generally lenders do not refund this application fee if you are not approved for the loan or if you decide not to take it.

Appraisal Fee: This fee ($150 to $400 depending on the price of the home) pays for an independent appraisal of the home you want to purchase. The lender requires this estimate of the market value of the house for the loan. Factors to be considered in determining market value are: present cash value; use; location; replacement value of improvements; condition; income from property; net proceeds if the property is sold, etc. The appraisal is a critical factor in determining how much of a mortgage the bank or mortgage company will approve. After the appraisal is completed, the borrower is normally entitled to a copy of the appraisal from the lender.

Credit report Fee: Three major national credit bureaus (Equifax, TransUnion and Experian) supply lenders with the information on your credit behavior. Consumers typically pay $45 to $55 for this report.

Title search and title insurance: A title search is a detailed examination of the historical records concerning a property. These records include deeds, court records, property and name indexes, and many other documents. The purpose of the search is to make sure the buyer is purchasing a house from the legal owner and there are no liens, overdue special assessments, or other claims or outstanding restrictive covenants filed in the record, which would adversely affect the marketability or value of title.

A title search can show a number of title defects among these are unpaid taxes, unsatisfied mortgages and judgments against the seller. But there are some hidden defects that even the most diligent title search may never reveal. For instance, the previous owner could have incorrectly stated his marital status, resulting in a possible claim by his legal spouse. Other problems include things like fraud, forgery, defective deeds, mental incompetence, confusion due to similar or identical names, and clerical errors in the records. These defects can arise after you have purchased your home and jeopardize your right to ownership.

A certificate of title -- issued by a title company that did the title search -- offers no protection against any hidden defects in the title which an examination of the records could not reveal. A title insurance protects against any tax liens, unpaid mortgages, or judgments missed in the research of the history of title on the property. If a claim is made against your property, title insurance will, in accordance with the terms of your policy, assure you of a legal defense and pay all court costs and related fees. Also, if the claim proves valid, you will be reimbursed for your actual loss up to the face amount of the policy.

Basically there are two different types of policies - a lender's policy and an owner's policy. The lender's policy protects the lender's interest in the property as security for the outstanding balance under the buyer's mortgage. The owner's policy safeguards the buyer's investment or equity in the property up to the face amount of the policy. The cost of the policy is usually based on the loan amount.

It is required to obtain a lender's title insurance policy only. If you also desire the protection of title insurance you should purchase a buyer's title policy. This is a one time premium, and usually the cheapest rate might be offered by the company that did the title search. It is also advisable to inquire about the seller's title insurance policies on the property, for it may be possible for you to obtain a policy at a lower reissue rate.

Escrow Account: Most lenders require you to pay for some items that will due after closing. These prepaid items usually include insurance premiums (for Homeowners Insurance -- also called Hazard, or Fire Insurance -- and Private Mortgage Insurance) and Real Estate Taxes. The HUD regulations limit the amount of money a lender may require the borrower to hold in an escrow account.

Flood Certification: Some homes require flood certification fees, amounting up to $30. It verifies that the property is not in a flood zone. If the property is located within a defined zone the lender will require a flood insurance policy.

Recording and Transfer Charges: A small fee (to $50 to $150) to cover the cost of the paperwork required to record your home purchase.

Interim interest: Accrued interest from closing date until the end of the month.

In addition South Bay Brokers charges a $250 document compliance fee which covers all of the paperwork, and has SBBI staff copy and scan all documentation and provides a CD after close of escrow.

 

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Keith Kyle
Realtor, e-Pro, 
Top Producing Agent 
South Bay Brokers 
2501 N Sepulveda Blvd 
Manhattan Beach, CA 90266 
310-251-2344 
Keith.Kyle@SouthBayBrokers.com

 

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