First-time home buyers can be jolted out of their American dream pretty quickly, if they haven’t researched closing costs. Property fees are just the beginning. Loans, insurance, taxes and title, and everything else associated with buying a home will have additional charges. Each one seems minimal, but together they can quickly add upwards to 5 percent of a home’s price to the final total.
Before agreeing to lend a home buyer money, the mortgage lender will want to make sure the property is worth the purchase price. To find out, the lender will require some checks, and each of these comes with a cost. First, a certified professional will need to give the home an appraisal. This can easily cost from $400-$600. Secondly, the buyer is responsible for getting an inspection. This is not required, but strongly encouraged. These reports cost about the same as an appraisal. However, each of these reports has a different purpose.
Appraisals ascertain how much a home is worth to the lender. A home inspection, on the other hand, looks at the current condition of a property, and records any major structural problems, as well as any defective updating and maintenance. Additional inspections such as checking for lead-based paint, land surveys, and flood zone determination may also be required by the lender.
A home’s title must be clear, before a lender will agree to provide a mortgage. Therefore, the lender will require a title search, which will cost a few hundred dollars. The lender and the buyer will also need title insurance, in case any problems arise after the sale. The buyer and seller pay separate title search and closing fees, which are vital to insuring ownership is cleanly transferred.
Home loans will have additional fees tacked onto them. One of the biggest of these will be the underwriting fee, which covers the cost of preparing the mortgage. This will be approximately 1 percent (or a flat fee), and it will go to the underwriter or lender as a processing fee. It’s vital to have a lender who is willing to go over all the costs thoroughly, and make sure you understand each cost.
Another fee to prepare for, are prepaid interest fees. Usually, there will be a gap between the day the sale has been settled and the date of the first mortgage payment. To cover the interest the mortgage accrues during this time, the buyer will pay it as part of their closing costs.
The next set of fees buyers encounter will be all of the costs associated with insuring the mortgage and home, as well as community expenses. Lenders may require the buyer to pay mortgage and homeowner’s insurance before approving the loan, although mortgage insurance is usually added to the monthly payment.
Government-insured mortgages will also include additional costs. Veterans Affairs, the U.S. Department of Agriculture, and the Federal Housing Administration all have guarantee or insurance premiums. These can range anywhere from one to four percent of the loan principal.
A home’s location can also add to a buyer’s final closing costs. Property taxes vary significantly by location, but most local governments will ask for at least a partial payment upfront. Buyers may also need to pay at least part of the fees associated with condos or private communities.
Closing costs are a necessary evil associated with buying a home. In some instances, they may be waived, not applicable, or can be included in the sale price as part of the negotiations. By understanding what fees are involved in the purchase of a home, however, buyers can prepare and avoid the sticker shock that often comes when closing the sale of a home.
Photo credit: Getty images/Natee Meepian