When are closing costs due?

Closing is when the title of the property is transferred from the seller to the buyer, and is the last step in buying a home. Closing costs are the fees associated with your purchase. They are incurred by either the buyer or seller and can vary in each situation, depending on where you live, the property you buy, and the type of loan you choose.

When are closing costs due? You could pay as you go along for each step involved, but typically, closing costs are all due at the close of escrow. In many cases, they’re all rolled into the mortgage, which spreads them out over time but boosts your monthly house payment. Whether you are a first-time buyer looking to enjoy the benefits of owning your own home or looking to refresh your memory, we’re sharing everything you need to know about closing costs.

How much are closing costs for buyers in California?

Homebuyers typically pay about 2 to 5 percent of their residence’s purchase price in closing costs. That can be a significant amount, so again, work with your agent to determine what is negotiable. Your lender will give you a loan estimate within three business days of receiving your completed loan application and it will include the total sale price as well as what the closing costs on your home will be. But these are just an estimate and many of the fees listed can change. If they do change, you should receive a revised loan estimate.

Even before closing costs are due, the lender will require that you have a homeowner’s insurance policy on the property. Unless you’re paying cash for the house, you cannot buy without backing from a mortgage lender, which comes in the form of a commitment letter.

Your lender is required to outline your closing costs in the loan estimate and a closing disclosure you receive before the final day of closing. Take the time to review them closely and ask questions about anything you don’t understand.

What do closing costs cover? 

With so many types of closing costs possible, we’ve narrowed down a list of the most common examples homebuyers might incur. One of the reasons to use a real estate agent is that they can keep you apprised before closing costs are due, so there shouldn’t be any surprises. Just remember that everything is negotiable, with the seller sometimes agreeing to share closing costs or drop the home’s price to help move the real estate transaction along.

Here’s a look at the total closing costs you might face:

• Application fee: Covers the cost for the lender to process your application. Before submitting an application, ask what this fee covers. It can often include things like a credit report for your credit score (see below), as well as a home appraisal. Not all lenders charge an application fee, and it can often be negotiated.
• Appraisal fee: Paid to the appraisal company to confirm the fair market value of the home.
• Attorney fee: Pays for an attorney to review the closing documents on behalf of the buyer or lender. Not required in all states.
• Closing fee or escrow fee: Paid to the title company, escrow company, or attorney for conducting the closing. The title or escrow company oversees the closing as an independent third party in your home purchase. If you’re not purchasing in California, keep in mind that some states require a real estate attorney be present at every closing.
• Courier fee: Covers the cost of transporting documents to complete the loan transaction as quickly as possible.
• Credit report: A Tri-merge credit report is pulled to get your credit history and score. Your credit score plays a significant role in determining the interest rate you’ll get on your loan.
• Escrow deposit for property taxes and mortgage insurance: Often you are asked to put down two months of property tax and mortgage insurance payments at closing.
• FHA up-front mortgage insurance premium (UPMIP): If you have an FHA loan, you’ll be required to pay the UPMIP of 1.75 percent of the base loan amount. You can roll this into the cost of the loan if you prefer.
• Flood determination or life-of-loan coverage: Paid to a third party to determine if the property is located in a flood zone. If it is, you will need to purchase flood insurance, which is paid separately.
• Home-inspection: You will most likely arrange for your own home inspection to verify the condition of a property, and to check for home repairs that might be required before closing.
• Homeowner’s insurance: Covers possible damages to your home. Your first year’s premium is often paid at closing.
• Lender’s policy title insurance: Insurance to assure the lender that you own the home and the lender’s mortgage is a valid lien. It also protects the lender if there is a problem with the title. Similar to the title search, but always a separate line item.
• Lead-based-paint inspection: Covers the cost of evaluating lead-based paint risk.
• Loan discount points: Points are prepaid interest. One point is 1 percent of your loan amount. This is a lump sum payment that lowers your monthly payment for the life of your loan.
• Owner’s policy title insurance: A title insurance policy that protects you in the event someone challenges your ownership of the home. Usually optional.
• Origination fee: Covers the lender’s fees and administrative costs. Usually about 1 percent of the total loan, but you can sometimes find mortgage loans with no origination fee.
• Pest inspection: Covers the cost to inspect for termites or dry rot, which is required in some states and for government loans. Repairs can be expensive if evidence of termites, dry rot, or other wood damage is found.
• Prepaid interest: Most lenders will ask you to prepay any interest that will accrue between closing and the date of your first mortgage payment.
• Private mortgage insurance (PMI): If you’re making a down payment that’s less than 20 percent of the home’s purchase price, you probably will be required to pay PMI. If so, you might need to pay the first month’s PMI payment at closing.
• Property tax: Typically, lenders will want any taxes due within 60 days of purchase by the loan servicer to be paid at closing.
• Recording fees: A fee charged by your local recording office, usually city or county, for the recording of public land records.
• Survey fee: Paid to a survey company to verify all property lines and items like shared fences on the property. Not required in all states.
• Title company title search or exam fee: Paid to the title company for doing a thorough search of the property’s records. The company researches the deed to your new home, ensuring that no one else has a claim to the property.
• Transfer tax: Tax paid when the title passes from seller to buyer.
• Underwriting fee: This also goes to your lender, covering the cost of researching whether to approve you for the loan.
• VA funding fee: If you have a VA loan, you could be required to pay a VA funding fee at closing (or roll it into the cost of the loan if you prefer). This is a percentage of the loan amount that the VA assesses to fund the VA home-loan program. However, some borrowers are exempt from this fee. The percentage depends on your type of service and the amount of your down payment.

Who Pays for Closing Costs?

Closing costs are expenses associated with the home buying process that both the buyer and the seller incur. However, it’s important to note that the responsibility for paying these costs can vary depending on various factors, such as local customs, negotiations, and the purchase agreement terms.

Buyer Closing Costs

Typically, the buyer is responsible for most of the closing costs. This includes expenses such as appraisal fees, the application fee, recording fee, and loan origination fee. Buyers should budget for these costs and be prepared to pay them at the closing of the sale.

Seller Closing Costs

While buyers typically bear the brunt of the closing costs, the seller is not entirely off the hook. The seller is usually responsible for costs like real estate agent commissions, the transfer tax, and some portions of the property taxes. However, sometimes these expenses can be negotiated between the parties involved so this is something to keep in mind.

Can you avoid paying closing costs?

As mentioned, many of the fees that make up closing costs are negotiable and some are completely unnecessary, especially things such as high administrative, mailing or courier costs charged by your lender. Remember that you can shop around and might be able to find other lenders who are willing to offer you a loan with lower closing fees.

Ways to Reduce Closing Costs

Closing costs can add up, but there are ways to reduce them and save some hard-earned cash. Consider the following strategies:

Negotiate Seller Concessions

One effective way to reduce your closing costs is by negotiating seller concessions. These are agreements where the seller agrees to contribute a certain amount towards the buyer’s closing costs. Discussing this possibility with your real estate agent and including it as part of your offer is important.

Shop Around for Lenders

Don’t settle for the first lender that comes your way. Shop around and compare loan offers from multiple lenders. Look for competitive interest rates, reduced origination fees, and discounts on certain closing costs. Doing your due diligence can help you find the best deal and save money.

Consider Loan Programs

Explore loan programs that offer assistance with closing costs. For example, if you’re a veteran, consider a VA loan, which often has lower closing costs and may not require a down payment. If you qualify for an FHA loan, you may be eligible for seller concessions and a lower down payment requirement.

Request Loan Estimates

Once you’ve chosen a lender, request a loan estimate. This document outlines the estimated closing costs associated with your loan. Carefully review it and compare it with estimates from other lenders. If you notice any discrepancies or have questions, don’t hesitate to seek clarification from your lender.

Opt for a No-Closing-Cost Loan

Another option to explore is a no-closing-cost loan. With this type of loan, the lender covers some or all of the closing costs in exchange for a slightly higher interest rate. While there may be better choices for some, it can be beneficial if you prefer to reduce upfront expenses.

Time Your Closing

Consider timing your closing strategically. Closing towards the end of the month can reduce prepaid interest costs, as you’ll have fewer days before your first mortgage payment is due. Discuss this option with your lender to see if it aligns with your financial goals.

Conclusion

Closing costs are inevitable in the home buying process, but there are ways to minimize their impact on your finances. By understanding who typically pays for closing costs and implementing strategies to reduce them, you can save money and achieve a more affordable transaction. Remember, working closely with your real estate agent and lender to explore all available options and make informed decisions is important.

 

Reviewed by Chris Fryson
Chris Fryson currently serves Berkshire Hathaway HomeServices California Properties as its VP of Human Resources. Prior to this role, he was a successful Branch Manager in several offices throughout San Diego and has won several awards in his service to the real estate market and its professionals.

Still have questions? Reach out to one of our many qualified real estate agents who can guide you through every step of the process.