Want to learn all about closing costs in the US? Check out this guide to help your clients plan their budget accurately and help them with affordability concerns
For many people in the United States, becoming a homeowner is one of the biggest decisions of their lives. But there’s one last thing that they need to do before the deal goes through: pay the closing costs. While this expense is paid for by both the homebuyer and the seller, the brunt of the payment comes from the homebuyer.
It’s vital that you guide your clients through closing costs and help them prepare for what to expect. Understanding the details of these costs can establish you as capable and trustworthy.
In this article, Mortgage Professional America will go through everything you need to know about closing costs. We explain what they are and give some common examples. We will also talk about what to do when your clients can’t afford them and more.
What are closing costs?
Closing costs are extra fees that your clients pay at the end of the home buying process. The term “closing” refers to the transaction that takes place when the property title is officially transferred from the home seller to the homebuyer. It is during this closing period that taxes and fees that came from the home purchase are assessed.
How are closing costs calculated?
Simply put, closing costs pay for everything that went into the real estate transaction, above and beyond the purchase price. Generally, closing costs range from 1 percent to more than 5 percent of the home’s purchase price. They are subject to national, state, and local tax rates.
For instance, mortgage origination will usually add to the costs, with the bank or mortgage lender charging a fee to create the property loan. This is usually 0.5 percent to 1 percent of the amount of the mortgage.
To know more about closing costs, watch this clip:
Existing homeowners and repeat clients might already have experience with what goes into closing costs. As such, you might want to focus more on guiding first-time buyers through what they need to know.
Common closing costs
Here is a list of closing costs that your clients can expect to pay:
- mortgage origination fees
- survey fee and property appraisal fees
- private mortgage insurance (PMI)
- mortgage points
- attorney fees
Let’s discuss them one by one:
1. Mortgage origination fees
Mortgage origination fees are paid by your clients for processing and underwriting the home loan. Underwriting is a part of the process of approving the mortgage. This provides banks and mortgage lenders with information such as your clients’ credit history to prove that your clients can repay the mortgage.
Mortgage origination is subject to changes in market conditions.
2. Survey and appraisal fees
Survey and appraisal fees will help your clients confirm the fair market value of their property. While the cost of these fees varies, they’re mostly around a few hundred dollars. For example, the average price for a property appraisal of a single-family home is less than $400.
3. Private mortgage insurance (PMI)
Your clients will likely need PMI if their down payment is less than 20 percent. This type of insurance protects the bank or mortgage lender in case the homebuyer cannot afford to repay the property loan.
4. Mortgage points
Mortgage points are optional fees that your clients can pay upfront to lower their mortgage interest rate. Each point costs 1 percent of the total loan amount and can reduce the interest rate by about 0.25 percent.
Buying mortgage points can make sense if your clients plan to stay in their home for a long time. It will allow them to save more over the life of the mortgage. However, it will also increase their closing costs.
5. Attorney fees
In certain areas, your clients will be required by law to have an attorney throughout this process. Attorney fees can be paid as a flat fee separately or included in their closing costs.
Other closing costs
- escrow deposit
- home inspection fees
- real estate agent fees
- taxes on home loan amount
- cost of running a credit report
- cost of completing title search
- document recording fees on the deed and mortgage
How are closing costs estimated?
Closing costs are estimated by adding up all the fees, charges, and prepaid expenses tied to a mortgage and the home purchase itself. They usually range from 1 percent to more than 5 percent of the property price. You can also help your clients make an estimate by using standard forms and online calculators.
Let's use a home listing from Redfin as an example:
The price of this house, according to Redfin, is $189,000. It’s located in Kansas City, Missouri. The average closing costs are $2,061 in this state, representing about 0.8 percent of the average home sale price. Based on this example, the estimated closing costs for this home would be around $1,512.
Paying for closing costs: homebuyers vs. sellers
In terms of closing costs, mortgage brokers must know who is responsible for each payment, whether it is the homebuyer or the seller. Closing costs are paid to different entities and this can often cause confusion.
Homebuyers and sellers usually split the closing costs. However, it is common for the homebuyer to cover a larger share compared to the seller. Understanding responsibilities early helps avoid disputes during the final stages of the sale.
If a seller wants to use escrowed money for home improvements or repairs, they must cover it separately. Escrow funds cannot be used freely. The seller will need to pay for repairs using either the profits from the home sale or personal funds outside of the escrow account.
Mortgage brokers should also remind homebuyers to check whether they are required to prepay for homeowners' insurance and property taxes at closing.
Seller expenses
While it is possible to negotiate who pays for what, here are some of the more common expenses a seller will have to pay as part of the closing costs:
- transfer tax
- seller attorney fees
- prorated property taxes
- credits toward closing costs
- Homeowners Association (HOA) fees
- any escrowed money promised to the home buyer
Whether you are working with a homebuyer or a home seller, closing costs will be a major part of their real estate transaction. Mortgage brokers must guide both sides through these expenses from the get-go with clarity and transparency.
What if I can't afford closing costs?
If your clients can’t afford closing costs, here are a few ways to avoid them:
Negotiate on the mortgage
The smartest place to start waiving closing costs is with the bank or mortgage lender. Occasionally, your clients can negotiate a no-closing-cost mortgage. However, mortgage providers can raise the interest rate or add the closing cost to the overall cost of your clients’ mortgage.
Closing costs won’t really disappear and will still have to be paid at some point.
Negotiate with the seller
Loan payoff costs and commission fees can quickly add to the total closing costs. The same is true for transfer taxes. However, your clients might have the option to negotiate with the seller to cover some of these expenses.
In some cases, certain loan programs allow the seller to offer credit toward the homebuyer’s closing costs. This can help finalize the deal and might also provide tax benefits for the seller.
Negotiate origination fees
To offset some closing costs, your clients should work closely with their bank or mortgage lender and ask about the following:
- waivers
- credit options
- fee reductions
When the bank or mortgage lender provides an estimate after the mortgage application is complete, it’s a good opportunity to review each line item carefully. Still, mortgage brokers should remind their clients that home loan companies might offset closing costs by raising the interest rate or adding the costs to the total mortgage amount.
Check for discounts
Discounts might be available for anyone who is in the military or in a union. These discounts are usually in the form of rebates for closing costs. As such, it’s important to research to see which benefits might be available to your clients.
Seller concessions
Before completing the deal, both homebuyers and sellers must pay their share of the closing costs. If you’re assisting a homebuyer, you should explain how they can negotiate with the seller for help covering some of these costs. These negotiations are often called seller concessions.
If your clients believe that they will have difficulty paying the money needed to close, seller concessions can be a huge benefit. But there are limits on how much a seller can contribute toward closing costs. The maximum allowed depends on several factors, including the down payment amount and the type of mortgage. Another factor would be whether the home will be used as a primary residence.
Helping your clients prepare for closing costs
Closing costs vary widely from one client to another. Even the most common types of mortgages can have different cost structures. Some closing costs are required by the bank or mortgage lender. Others are required by local or state governments. Some costs, such as optional inspections or warranties, might depend on your client’s preferences.
If you help your clients prepare early and explain their options with clarity, you can make the closing process less stressful. By doing this, you’ll set them up for a smoother, more successful closing experience.
Want to share some insights from helping clients manage closing costs? Feel free to comment them in the space provided below.
