What Are Closing Costs When Buying a House? Closing costs are typically out of pocket expenses, loan fees and costs related to the actual closing of your property purchase. Closing costs for buyers do not typically change other than the amounts. The types may also vary from state to state. The allocation of who pays which closing costs may be determined by each state and also what’s customary in each area.
Closing Costs Definition
In general all the costs a buyer is going to pay to enable a home purchase is lumped under the heading of closing costs. But it’s important to understand which costs are truly attached to your closing and which are not. This also helps you answer the question, when are closing costs due?
We’ll also answer the question: When do you pay closing costs and downpayment?
Out of Pocket Costs
If you decide to buy a house you’ll need some of your lump sum of funds for closing costs to be available right away. The first cost you’ll likely have is a home inspection fee. Home inspectors do not wait until closing to be paid because their services are not subject to you closing. They provide a service and expect payment at the time of service. The feee varies by company, type and size of property you are in contract to buy.
Typically inspections are done once in contract, not before. Your agent can explain how the home inspection works in your state. Here in Illinois you have 5 business days to get your inspection completed. I know of several states where it’s 15 days.
The cost of your home inspection will be around $300-$800.
You may choose to have other inspections done. This include Radon, Lead paint, Mold, structural, termite. You are allowed to have whatever inspections you deem necessary, all of them are your cost. The most common is Radon and one I highly recommend.
Exception: Well and septic reports/inspections are a seller cost here in Northern Illinois.
Mortgage Application Fee & Appraisal Fee
The appraisal required by a lender is to make sure a property is of sufficient value to support the loan you have applied for. This is usually an out of pocket cost you pay up front. Just like the inspector, an appraiser is carrying out his service and it is not subject to you closing. So he is paid at the time of service. Allow about $400 for this, it can be more or less. Again it depends on location and property type.
If you are applying for an FHA backed loan the appraiser has more to do, so his fee may be higher. You lender will know the fee to be collected from you once he sees your purchase contract.
The mortgage application fee is a much larger cost. Most lenders now roll the fee into your mortgage and it’s essentially collected at closing. Because all lenders are different, find our from any lender you are considering how much their application feee is and when it gets paid. Also ask what happens if your mortgage is denied or if your home purchase fails along the way for any other reason.
Not getting a mortgage? Great none of these fees apply!
Real Estate Attorney Fees
Here in Northern Illinois we use attorneys for our residential sales. It’s not mandatory but most home buyers and sellers would be clueless about what’s needed to close a sale here. The attorneys do the legal leg work here in Barrington Illinois. In other states most of that work without an attorney is split between the agents and the title escrow company. That means there’s no legal representation in most transactions.
An attorney will charge around $500 for a buy or a sale. Discounts maybe given if you are doing both at the same time. Higher and lower prices are available. It’s not a price fixed fee. Most attorneys include a set amount of hours in their fee. if your purchase uses those hours, you may be required to pay an hourly rate after that for the extra time.
Most attorneys will add their fee to the closing costs paid at closing. It will show as a line item on your closing statement. The amount you are going to bring to closing will include that fee. However some buyers and sellers prefer to pay their attorneys out of pocket and simply write a check at or just prior to the closing. Be aware of you do not close, your attorney will have incurred some costs for work already completed and will expect you to write a check for the bill he gives you.
Non attorney states. Attonerys are not used in many states, especially small town America. They are not used in Southern Illinois. Just remember that attorneys are something you may always chose to use, no matter what state you are buying in. If you want the legal protection or support, hire one, and pay the fee.
Are REALTOR® fees included in closing costs? Most REALTOR® fees are paid by the seller. But not always. Here are three scenarios for buyers to consider.
Buyer Scenario One
Mr seller has put his home up for sale and has agreed to pay his agent a percentage of the sale value as compensation. He has authorized his agent to give a portion of that amount to your buyers agent. The property is advertised in our MLS. That means your buyers agent is agreeing to accept whatever that amount is.
You have no written buyers agreement, so no additional fees are due to be paid.
Let’s say the seller has agreed to a 7% fee and wants $2.00 (2 dollars) to be paid to the buyers agent. Your agent is entitled to just that $2. He cannot ask you for any compensation unless you have a buyers agent agreement that outlines a minimum compensation.
Buyer Scenario Two
Mr seller has put his home up for sale and has agreed to pay his agent a percentage of the sale value as compensation. He has authorized his agent to give nothing to your buyers agent. The property cannot be advertised in our MLS. (Rules of our MLS in Northern Illinois). That means your buyers agent is not necessarily going to know the house is for sale. But assuming he finds out and wants to show it to you, he needs to contact the listing agent and then you to find out who and what he’ll get paid.
Assuming the seller stands firm on his instructions, your buyers agent will turn to you for compensation. You will need to negotiate. Remember your agent gets no salary payment, he works on commission only 99% of the time. Is it fair to have him represent you for zero payment?
Buyer Scenario Three
Your buyers agent has pre-negotiated with you that he is to receive a minimum compensation of 3% of the purchase price. The seller has agreed to share the compensation of his listing agent at a rate of 2.25% of the sale price. That leaves your buyer 0.75% short. You’ll be expected to pay your agent at closing by writing a check for the difference.
These scenarios are not typical. There is no such thing as typical or standard when we talk about compensation. They are used to give you examples and to show that your buyers agent may not cost you nothing. Make no assumptions when hiring a buyers agent to help you. Ask first.
Note: Every state has different laws concerning representation. Compensation rates are always negotiable by law.
Often buyers want to reduce the interest rate to be charged on their mortgage. One way of doing this is to reduce the term. Shorter mortgages typically carry lower interest rates. Another way is to pay points at closing. This is considered a closing cost and will be outlined in your lenders mortgage approval.
Paying points essential buys down the interest rate one quarter percentage at a time or per point. 1 point is equal to one percent of your loan. Here’s an example:
Your loan is $200,000. 1 point is $2,000 or 2 points $4,000. If you interest rate is 5%, by paying 1 point you’ll cut the rate to 4.75%. 2 points would cut the rate to 4.5%. If you plan on staying in the property long term this reduction can add up over the years. If you intend to move short terms, points may not be worth the up front cost.
The average break even point for borrowers is 68 months. That’s almost 6 years. The average period of time owners stay in a property = 7 years. Consider that.
Home Owners Association Fees
Many HOA dues are paid yearly or monthly. The likelihood is the seller has paid more than he is due to pay based on the closing date. As the buyer assumes responsibility for HOA from the day of closing, you’ll probably have to reimburse the seller for his overpayment. This is not really a closing cost, it’s more a balancing of fairness for monies already paid.
Home Owners Insurance
As a buyer you’ll want to buy home insurance for your property. If you are getting a mortgage, it’s a mandatory years premium up front. Sometimes buyers will buy this out of pocket in advance of the closing but I have also seen it on a closing settlement statement. The title company will pay the premium. Your lender will want proof of payment before funding your loan. A title officer can do this for you, or bring your proof of payment to your closing.
Other Lender Fees
If you are getting a mortgage your lender will have pulled a full credit report on you. The charges are added to the lenders closing costs and usually paid by you at closing.
Lenders need to know if the home you are buying is in a flood zone. If it is, you’ll likely have to buy flood insurance as well as regular property insurance. The lender will seek information about your property and flood zones.
The title of the property will be updated and recorded, showing you as the new owner. This fees are around $200 (2019). There are government recording fees as well, usually under $100 (2019).
Wire Service Fee
Your lender is going to wire your mortgage funds to the title company. This fee is added to your closing costs. It’s around $50 (2019)
Closing Costs To Transfer Ownership
On the day of closing, buyers and sellers with their attorneys attend a title company. Here in Northern Illinois we do not use an escrow service to close a sale/purchase. We close at the table. While buyers usually attend, many sellers do not. Agents are not required to but a good supportive REALTOR® will be there.
The title company is charged with making sure all legal documents and loan documents are correctly completed. They’ll be in contact with a mortgage company. They must collect and disburse all the funds at the time of closing. This includes:
- Paying off a sellers mortgage.
- Collecting your down payment.
- Collecting and disbursing legal fees, brokerage compensation.
- Receiving mortgage funds.
- Balancing all pro-rated fees.
- Balancing the settlement sheet and transferring funds from buyer to seller.
- Providing settlement amount to seller.
They deal with checking all the paperwork for mortgages and legally transferring ownership under direction of the attorneys.
For this they charge a fee. It’s usually split 50/50 between buyer and seller on a cash sale. Financed deals often charge this fee all to the buyer side. There are also fees to send in the paperwork for the buyers mortgage. These fees vary, it’s up to the title company to set their own fees. Allow $1500 to $2000. (2019 – Northern Illinois)
Note: We have provided most of the information here for the area we work, currently Northern Illinois. To establish fees in any other areas, call your local real estate agent and loan officer.
Summary – What Are Closing Costs When Buying a House
Quick Look – What is included in closing costs for buyers?
Closing Costs Paid Before Closing
- Property Inspections
- Mortgage Application Fee
- Mortgage Appraisal fee
- Earnest Money – Deposit
- Property Insurance – Can be Paid at Closing
Closing Costs Paid At Closing
- Balance of Deposit/Your Down Payment
- Fees to Attorney – Usually
- Mortgage Points – May be Paid by Seller
- HOA fees
- Lender Fees to Close Loan