How do closing costs affect a home purchase?

This is an excellent question, one that more homebuyers need to ask. Before closing on the property, you have likely paid several fees already.

As part of your contract, you paid earnest money to secure the property. This payment showed the seller that you were a good-faith buyer who planned to move forward with the home purchase. Earnest money usually applies to the downpayment but can also be used for closing costs. 

To secure a mortgage, the lender requires an appraisal. An appraisal fee ranges from $300-$650 depending on the home’s size, purchase price, and distance the appraiser must travel. You may pay this in advance, or it may show up as an item on the closing disclosure statement, which will become payable on the day of closing. 

If your contract included a home inspection contingency, an inspector would have performed a home inspection which you’ll also have to pay for. During this process, the home inspector looks for damage or potential issues with the home’s plumbing, heating, and electrical, as well as the structural items such as roofing, siding, windows, and foundation. Home inspections can cost upwards of $500, depending on the home’s size. You may have paid this upfront, or it may likely be a charge on the closing disclosure statement. 

Most of these contingencies and fees should be satisfied to fulfill your purchase contract. They should not appear on the closing disclosure if you paid them directly to the service provider. They will be payable on the final closing day if you don’t pay them ahead of time.

Here are the most common closing-related costs payable on the day of closing

Lender fees 

Lender fees include credit report fees, points, flood determination, homeowners insurance, and private mortgage insurance (if applicable). 

There are two types of points in a mortgage process—origination points, and discount points. Homebuyers can prepay discount points as a way to lower their interest rate. In some cases, you can use points money toward closing costs. Origination points are the fees your lender charges for the upfront work to secure your loan. 

Lenders may also require a flood determination to ascertain if the property lies in a flood plain. The borrower pays the cost of the determination. If the home exists within a flood plain, your lender will require you to get special flood insurance for the property. 

Your lender will also require proof of homeowners insurance before releasing funds for the purchase. The lender will need the first year’s insurance to be paid by closing. You can make future payments through escrow if you set your mortgage payments up to collect that from you monthly. 

You will also see charges for documents and processing fees or loan origination fees. These fees can include loan application processing, underwriting, and other services.

“Closing costs are a combination of lender fees, title fees, and setting up your escrow accounts for taxes and insurance payments,” explains Josip Rupena, founder and CEO of Milo. “The section that your mortgage company can impact is the lender fees. The other two depend on the title company you choose as well as the property tax collection and insurance requirements for your property.”

Third-party fees

These are fees charged by the title company to complete all of the necessary background checks on the property. The title company will perform a title search to ensure the seller is the actual owner of the property and to make sure there are no liens against the property or other issues that may prevent the sale. As part of this process, the title company issues title insurance to protect against past defects in the property’s title, such as forged documents, undiscovered heirs, or undisclosed liens—to allow for a clear title for purchase. 

Your title company will also check local tax records to ensure the previous owner has all taxes paid up to date. If not, the seller must settle all payments before closing on the home. The tax information allows the title company to prorate the new buyer’s taxes. For example, if you close in September, the previous owner will be credited taxes paid through the last three months of the year. As the new buyer, you will see a tax charge for the last three months of the year. 

The title company also checks for unpaid utility charges and homeowner association fees, and unpaid charges will be part of the tax bill. The previous owner will have to clear any outstanding fees before closing. 

You’ll also pay your agent and seller’s agent real estate commissions at the final closing. These fees will show up on the closing disclosure statement. If you negotiated with your real estate agent for a reduced commission, be sure to double-check those commission numbers.  

Other potential homebuyer fees

If you buy the property without a real estate agent’s help, you may want to hire an attorney to review your contract or represent you throughout the purchase process. Attorney fees are typically paid directly and at the time of closing. 

By now, you know that purchasing a home is a dynamic process that demands your careful attention. Many moving parts need to fall into place to determine the final closing amount. If you paid a fee at any point along the way, keep track of it and closely examine your closing disclosure statement. This way, you won’t pay twice.

“It’s also important to enquire about property taxes and HOA fees when touring homes,” says Assurant Home Loans in Irving, TX. “When deciding between mortgage lenders, be sure to compare rates and other charges. Get a quote from multiple title companies to compare their charges before signing the contract. Shop around for homeowners insurance and check if bundling with your auto insurance saves you any money, and analyze if escrow waivers suit your situation.” Along with closing costs, these factors will also impact how much house you can afford.

Possible seller credits

For some home purchases, certain repairs identified in home inspection reports do not get completed, or the seller offered an allowance for the new owner to complete the work after closing. These items will show up on your closing disclosure statement as a credit from the seller. In effect, such credits lower the purchase price and reduce closing costs. A typical allowance might be for new carpeting or new appliances.

Is it possible for closing costs to change? 

Yes, your closing costs could change at the last minute. For example:

• If the home appraises for less than the sales price, the buyer and seller may have to renegotiate the price. 
• A title search could turn up a problem, such as a lien on the property. 
• If the interest rates jump, you may want to change the type of loan you take out as the buyer. You may also decide to pay more or less for a down payment. 
• Before releasing the final funds, the lender may find a new issue with your credit history. A situation like this could change the closing costs if you need to pay down a credit line with loan funds or if the credit issue affects your interest rate and points.