Closing Costs Explained & Tips To Reduce Them

How Much Are Closing Costs?

 Closing costs generally range from 3% to 6% of the loan amount. For example, on a $200,000 mortgage, you might expect to pay between $6,000 and $12,000 in closing costs.

Can You Negotiate Closing Costs?

 Yes, you can negotiate closing costs! In some cases, the seller may agree to cover part or all of these expenses. Your ability to negotiate depends on the current real estate market conditions.

 Contributions from the seller, known as seller concessions, can be very helpful if you're struggling to cover closing costs. However, there are limits on how much a seller can contribute, based on the type of loan, occupancy, and down payment. Here’s a breakdown of seller concessions limits by loan type.

☆ Conventional Loans

For primary residences

• Down payments of 25% or more allow seller concessions up to 9%

• Down payments ranging from 10% to 24.99% allow seller concessions up to 6%

• Down payments less than 10% allow seller concessions up to 3%

For investment properties

• Seller concessions are allowed up to 2%

☆ FHA Loans

• Seller concessions are capped at 6% of the lesser of the purchase price or appraised value.

☆ USDA Loans

• Seller concessions are capped at 6% of the lesser of the purchase price or appraised value.

☆VA Loans

• Sellers can contribute up to 4% of the purchase price or appraised value (whichever is lower) towards escrow accounts and VA funding fees. There is no limit on seller contributions for discount points, origination fees, surveys, appraisals, and credit report fees.

☆ Jumbo Loans

• Seller concession limits for Jumbo loans can vary by lender.

Note: To prevent fraud, seller concessions cannot exceed the actual closing costs. For example, if your closing costs are $5,000 and the seller offers 6% on a $100,000 loan, you cannot pocket the extra amount beyond the $5,000 actual cost.

Common Closing Costs for Buyers

At least three business days before closing, your lender will provide a closing disclosure outlining all closing costs you need to cover. Common closing costs include:

• Application Fee

• Appraisal

• Attorney Fees

• Closing Fee

• Courier Fee

• Credit Reporting Fee

• Discount Points

• Escrow Funds

• Flood Certification

• HOA Transfer Fee

• Homeowners Insurance

• Home Inspection Fee

• Loan Origination Fee

• Lender’s Title Insurance

• Lead-Based Paint Inspection

• Owner’s Title Insurance

• Pest Inspection Fee

• Prepaid Interest Charges

• Property Tax

• Rate Lock Fee

• Recording Fee

• Survey Fee

• Tax Monitoring and Status Research Fees

• Title Search Fees

• Transfer Tax

• Underwriting Fee

Common Closing Costs For The Seller

Sellers typically cover:

• Attorney’s Fees

• Credits Toward Closing Costs

• Escrow Fees

• HOA Fees

• Prorated Property Taxes

• Real Estate Agent Commission

• Recording Fees and Transfer Taxes

 Tips to Reduce Closing Costs

1.      Shop Around for Lenders

 By rate shopping, chances are you'll save yourself a substantial amount of money. You have up to 45 days to shop, with EVERY pre-approval quote you got during this time only counting as a single inquiry on your credit report. TAKE ADVANTAGE OF THIS TIME!

2.      Get quotes from multiple lenders

 Get quotes from as many lenders as your heart desires to compare fees and interest rates. Choose a lender with low fees and competitive rates to minimize your overall closing costs. Don't Settle for the first lender who approves you, unless they offer the best rates and fees out of the bunch.

For tips and information on negotiating and choosing the right lender, check out  

   "Mortgage Shopping 101."

3.      Ask the Seller to Contribute

In a buyer’s market, the seller might be willing to cover some of your closing costs. Be sure to understand the seller concessions limit for your loan type.

Mortgage Insurance Explained

Mortgage Insurance could also be part of your closing costs or financed into the loan. It's important to understand all the Fees involved.

 Each type of loan has its own form of mortgage insurance, though they go by different names, they all serve the same fundamental purpose, to protect the lender by covering a portion of the loss in case the borrower fails to make payments or defaults on the loan.

★ Conventional Loans

PMI “Private Mortgage Insurance” is required if your down payment is less than 20%, usually costing between 0.1% and 2% of the loan amount.

 Your PMI fee is based on the current loan amount and is divided into monthly payments.

 For example, if the PMI rate is 0.8% on a $200,000 loan, the annual PMI cost would be $1,600. This cost is then divided by 12, resulting in a monthly PMI payment of approximately $133.33. Each month, the PMI payment may adjust if the loan balance changes. 

~Duration~

☆   You can request the removal of PMI when you reach 20% equity.

☆  Lenders usually automatically terminate your PMI When your loan balance reaches 78% of the home's original purchase price. Make sure to check this information on your loan terms.

 Note: The PMI rate remains the same, but the monthly PMI payment decreases as the loan balance is paid down. 

Equity is the difference between your home's current market value and the amount you owe on your mortgage. For instance, if your home is worth $100,000 and you owe $80,000, you have 20% equity in your home. This is important because if your home's market value increases, you could reach this equity threshold sooner to eliminate your PMI, saving you thousands of dollars!

★ FHA Loans

An upfront MIP "Mortgage Insurance Premium" of 1.75% is required, and an annual MIP fee of 0.45% – 1.05%

☆ Upfront MIP Fee
This fee is 1.75% of the loan amount and is paid at closing. It can be rolled into the mortgage to reduce out-of-pocket expenses, but it will be added to the home loan increasing your principal and interest payments.

☆ Annual MIP Fee
This fee ranges from 0.45% to 1.05% of the remaining loan balance, divided by 12, then included in the monthly mortgage payments.

 For example, if the loan amount is $200,000 and the monthly MIP fee is 0.80%, the annual fee would be $1,600, or $133.33 this month. Each month, as the loan balance decreases, the monthly MIP fee will also decrease accordingly. 

~Duration~

☆ If the down payment is less than 10%, MIP lasts for the life of the loan.

☆ If the down payment is at least 10%, MIP can be removed after 11 years. 

Note: The MIP rate remains the same, but the monthly MIP payment decreases as the loan balance is paid down. 

★ USDA Loans

USDA "Guarantee Fees" include a one-time 1% Upfront fee and an annual Guarantee Fee of 0.35%

☆ Upfront Guarantee Fee

This fee is 1% of the loan amount and is paid at closing. It can be rolled into the mortgage to reduce out-of-pocket expenses, but it will be added to the home loan increasing your principal and interest payments.

☆ Annual Guarantee Fee

This fee is 0.35% of the remaining loan balance, divided by 12 and included in the monthly mortgage payments.

For example, if the remaining loan balance is $200,000 and the annual guarantee fee rate is 0.35%, the annual fee would be $700. This translates to a monthly fee of approximately $58.33. The fee is paid monthly until the loan is fully repaid. Each month, the guarantee fee is recalculated based on the current loan balance, so as the loan balance decreases, the monthly fee will also decrease accordingly. 

~Duration~

☆  USDA Guarantee Fees last for the life of the loan, regardless of your down payment amount or how much equity you have.

Note: The guarantee fee rate remains the same, but the monthly fee amount decreases as the loan balance is paid down. 

★ VA Loans

 A "Funding Fee" is a one-time payment that acts as mortgage insurance to help cover some of the costs of the VA loan program, so it can continue to offer benefits to veterans, active-duty service members, and surviving spouses without requiring down payments or monthly mortgage insurance. The fee also helps the VA cover lenders' losses if a borrower defaults. 

☆The Funding Fee can be waived for certain individuals who qualify for an exemption

1. Veterans receiving VA disability compensation

2. Surviving spouses of veterans who died in service

3. Purple Heart recipients

 ☆The Funding Fee ranges from 0.5% to 3.6% of the loan amount. This fee can be paid as closing costs or financed into the loan.

 Funding Fees for Your First VA-backed purchase or construction loan

1. Down payment less than 5% – The VA funding fee is 2.15% of the loan amount

2. Down payment between 5% and 9.9% – The fee is 1.5% of the loan amount

3. Down payment of 10% or more – The fee is 1.25% of the loan amount

Funding Fees for Subsequent VA-backed purchases or construction loans

1. Down payment less than 5% – The VA funding fee is 3.3% of the loan amount

2. Down payment between 5% and 9.9% – The fee is 1.5% of the loan amount

3. Down payment of 10% or more – The fee is 1.25% of the loan amount

Note: The fee will vary for other VA Loan types for example manufactured home loans (not permanently affixed) the Funding Fee is 1%

When to Pay Closing Costs

 Your lender should deliver the final closing disclosure at least three days before closing.

 Typically, closing costs are paid at the closing meeting via check or wired to the closing attorney a few days beforehand. Review the final closing disclosure carefully to ensure all details are accurate.

 For personalized assistance, consult with a mortgage professional who can provide guidance based on your specific financial situation and goals.

Good luck! I hope this information helps you navigate the home-buying process with greater ease and confidence.

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