Closing costs are part of the home buying and home selling process. It doesn’t matter whether you are the buyer or seller. You’re going to have closing costs for which you are responsible. It is good to have an idea of what comprises closing costs and who is responsible for paying what. The last thing you want is to show up on closing day and receive an unpleasant surprise in the form of closing costs that you knew nothing about. Being prepared and having an estimate of the costs will allow you to have the proper amount of cash available to pay such costs. Some costs will be paid prior to the closing, while other costs will be paid at the closing.
Closing Costs Commonly Paid by the Buyer
If you are buying a home, you need to realize that the selling price of the home is not all you will be paying for. You must factor in closing costs. It’s a good idea to save money prior to the closing and perhaps even when you are just starting to look at homes to buy. This will ensure you have enough cash on hand to pay out-of-pocket costs associated with closing on your new home. As the buyer, you can expect to pay the following closing costs:
- A loan origination fee is the fee charged by your lender to process your loan application and carry the loan through to completion. You will be required to supply your lender with financial information including your debts, income, assets and employment. This information will need to be sent to underwriting to start the loan process. The origination fee covers these services, as well as everything it takes to complete the loan.
- If you’re using a mortgage broker instead of dealing directly with a lending institution, you will have to pay a mortgage broker fee. This fee is essentially the same as the loan origination fee. Your mortgage broker will submit your loan application to underwriting after they’ve collected your detailed financial information. They will also shop around to find a loan that fits your needs. You should never have to pay a loan origination fee and a mortgage broker fee. It should be one or the other.
- You can lower your interest rate by paying a discount fee. Paying down the rate can be an attractive option for homebuyers because it means they will pay less interest over time. This can really add up considering a standard mortgage is for a 30-year term. Not only will you pay less over the life of the loan, but a lower interest rate means your monthly payment will also be lower.
- When you get closer to closing, you are going to need an appraisal which will be required by your lender. The appraisal ensures that the loan amount you are seeking is justified by the fair market value of your home. Lenders don’t want to lend you more than what your home is worth. If the home doesn’t appraise for at least the selling price, you will either need to come up with a down payment or go back to negotiating with the seller.
- A termite and pest inspection will be required if you are buying an older home. You may not need to have such an inspection if you are buying a new home. A home inspection will reveal issues such as damage caused by termites, dry rot and other issues with the wood. If any issues are found, you will need to negotiate with the seller to fix the problems.
- You will likely want to get a home inspection, especially if you’re buying an older home. Such an inspection will identify any repairs that need to be made or any major problems with the home.
- If you are going to make a down payment of less than 20 percent of the selling price, you will be required to purchase private mortgage insurance. The lender requires this insurance to ensure they are protected should you default on the loan.
- When you purchase a home, you’ll be required to purchase homeowner’s insurance. You will possibly have to pay for an entire year of this insurance. Typically, though, the insurance premium will be rolled into your monthly mortgage payment. Homeowner’s insurance protects you from liability should someone have an accident on your property and provides coverage in the event of damage to your property.
- An escrow account fee will be charged by your escrow agent to handle the exchange of money at closing. You will likely use an escrow account where a portion of your monthly mortgage payment will be deposited to pay for your homeowner’s insurance and property taxes. Funds are disbursed for these expenses when they are due.
- Some buyers prefer an attorney represent them during the closing. If you have an attorney you will need to pay attorney’s fees for services provided. It’s possible the seller will have their own attorney as well. However, it is more common for both parties to use one attorney for the closing. You may be able to negotiate with the seller and split the attorney’s fees.
- You’ll need to pay prorated property taxes and municipal fees if you’re closing on the home for a time where the seller has paid these expenses. You will likely not close exactly when these items are due which means the seller will need to be reimbursed for such expenses beginning on the date you became the new owner of the home.
- Any time a transfer of property takes place, the transaction must be recorded with the city or county in which the home is located. Your local recording office will charge you a recording fee for the recordation of the transfer of property and listing you as the new owner.
- A title search fee, also known as an exam fee, is necessary and required by your lender to ensure you there are no problems with the title to your property. The title company will perform a thorough search of the property’s records which includes researching the deed to your new home and ensuring there are no claims to ownership to your new property.
This list of buyer’s closing costs is not a complete list, but it is some of the more common closing costs that you will encounter when buying a home. Your mortgage broker or lender will give you a Good Faith Estimate which lists the closing costs for which you’ll be responsible, and it is a accurate listing which means you’ll know what’s expected long before the closing and you’ll have no surprises on closing day.
Closing Costs Commonly Paid by the Seller
When you sell your home, you expect a big payment on closing day. However, the process of selling a home doesn’t happen without costs. As the seller, you want to know in advance which closing costs that you’ll be required to pay. This knowledge will prevent you from receiving a shock when you realize the proceeds from the sale of your home are less than what you were expecting. The following closing costs are commonly paid for by the seller:
- Your realtor will charge you a commission for helping you sell your home. The commission is usually negotiable, and the rate will depend on several factors including your market area. The buyer will have their own realtor. When you sell your home, the commission will need to be split between your realtor and the buyer’s realtor. For this reason, you may be able to negotiate with the buyer to pay a portion of the commission.
- If you still owe money on your home, you will need to pay that amount off. The actual payoff amount is going to be higher than the payoff amount because you will also be paying the interest on that final payment. Depending on the type of loan you have, you may be assessed a prepayment penalty. You should check with your lender to know if there is a prepayment penalty as well as when it ends. You don’t want to be in a position where you close on your home a month before the prepayment penalty ends, whereas if you waited a month that penalty would be obsolete, saving you a significant amount of money.
- You may need to provide the buyer with a credit for real estate taxes that haven’t been paid. Each municipality has a certain procedure and the amount you may have to pay will be determined by when the taxes are due. If the property tax bill becomes due after you’ve sold your home, then you will have to pay the buyer for the time in which you lived in the home. The amount you owe the buyer for property taxes increases as time goes by since the last time you paid taxes on your property. However, if you’ve prepaid the taxes that covers a time after closing, the buyer will have to pay you.
- You may be required to pay notary fees for all the documents that you must sign before a notary. If the closing takes place at the location of the title company, you most likely will not have to pay this fee. However, since you are the buyer, you may be allowed to sign all the documents before the actual closing at a place convenient to you. The downside is that you will have to pay notary fees for their services to bring the documents to you and witness your signature.
- The seller often must pay property transfer taxes. These taxes can be in the form of local, county and state transfer taxes. These taxes can really add up so it’s a good idea to know beforehand how much you’ll need to pay. Transfer taxes vary from one area to another. Some municipalities will determine the property transfer tax based on the selling price of your home. Other municipalities will charge a flat fee. In some areas, you are required to pay a capital gains tax for the proceeds generated from the sale of your home.
- It is possible that you will have to provide the buyer with an updated survey of your property. Therefore, you will have to pay a survey fee for a third party to come to your property and survey the area. You will then deliver the plat of survey to the buyer which shows the property boundaries. This is often necessary if a current survey of your home cannot be located.
- You should set aside some extra cash to pay for repairs or upgrades requested by the buyer. Often, the home inspection will reveal some minor repairs that must be made for you to proceed to closing. Having cash on hand to pay for such repairs will ensure you can proceed to closing without delay.
While this list of closing costs for the buyer is not all-inclusive, it is meant to give you a good idea of what to expect in the way of closing costs when selling your home. You have no doubt worked hard to build equity in the home you’re selling, and it would be nice to take all the proceeds from the sale to do as you wish. Unfortunately, you must deal with the closing costs. They are the cost of doing business when selling your home. If you know what you are going to be responsible for when you begin the home selling process, you will feel better about the transaction and avoid any surprises along the way.
Whether you are the buyer or seller, it is essential to go into the process knowing how much cash you’re going to need for the closing. The seller must realize their proceeds may not be as high as what they wanted after factoring in the closing costs. The buyer must know that they will be paying more than just the selling price of the home. Keeping these points in mind will avoid any shock on the part of either party.
Call The Wright Choice Team today at 804-307-2589 to tour available homes for sale in the Chesterfield County area.