Closing Costs on House Purchase and Refinance Transactions
In this article, we will cover and discuss the closing costs on house purchase and refinance transactions. Home buyers need to worry about the down payment and closing costs on house purchase when it comes to a home purchase. The down payment is normally 3.5% for FHA-insured mortgage loans.
Down Payment Versus Closing Costs on House Purchase
The minimum down payment requirement for conventional loans is 5% of the purchase price. VA loan programs and USDA loan programs do not require down payments. Both of these two mortgage loan programs offer 100% financing. All home purchase and/or refinance mortgage loan transactions have closing costs.
What Are Closing Costs on House Purchase?
Closing costs on house purchase are any fees and/or costs associated with the home purchase and/or home refinance of a residential mortgage loan.
What Are Examples of Closing Costs on House Purchase Transactions
Examples of closing costs on house purchase are transfer stamps, title insurance, homeowners insurance, pre-paid items ( insurance and tax escrows), and any other fees and costs associated with the transaction of the purchase and/or refinance of the property. Closing costs on house purchase can vary depending on the state and county where the transaction takes place and can be anywhere between 2% to 4% of the transaction amount. On a $200,000 home purchase, closing costs can range from $4,000 to $8,000. Closing costs can really put a dent in a home buyer’s finances. Connect With Our Loan Officer for Mortgage Loans
Ways Of Avoiding To Pay Closing Costs on House Purchase
There are two ways a home buyer can not worry about paying for closing costs on house purchase. The first and most common method is by getting a seller concession toward a buyer’s closing costs.
How Does Seller Concession From Seller To Buyer Closing Costs Work?
A seller concession is when a seller will contribute toward part or all of the home buyer’s closing costs on house purchase For example, say a seller wants a net of $100,000 in his pocket from the sale of his home and wants to help the buyer cover his closing costs because the buyer can only come up with the 3.5% down payment for an FHA loan.
How is Seller Concession Structured To Benefit The Home Seller?
The seller can raise the real estate purchase contract price to $105,000 and give the home buyer a $5,000 seller concession towards the buyers closing costs so the buyer does not have to worry about paying closing costs. The seller gets his $100,000 net price in his pocket, the buyer does not have to worry about any closing costs and only has to worry about the down payment and the deal is done.
What Do Seller Concessions Mean in an Appraisal?
The home needs to appraise and any leftover proceeds from the seller’s concession cannot be given to the home buyer in the form of cash. Any leftover seller concession needs to be returned back to the seller. A home buyer does not want to waste any seller concessions.
What Is The Maximum Seller Concession on FHA Loans?
The maximum amount of seller concession allowed with an FHA loan is 6%. The home seller can give any amount of seller concession to help with the homebuyer’s closing costs up to a 6% maximum of the home purchase price.
What Is The Maximum Seller Concession on Conventional Loans?
The maximum amount of seller concession allowed with a conventional loan is 3% on primary owner-occupant homes and second homes. The maximum seller concession on investment property loans is capped at 2%. Maximum seller concession towards buyers closing costs on an investment conventional mortgage loan is capped at 2%.
Maximum Seller Concession on USDA Loans
USDA loans are only available in USDA-designated rural areas in the United States.
What Is A Lender Credit?
If the seller is not willing to give a seller concession towards the home buyer’s closing costs, then the second way the home buyer can offset his or her closing costs is by getting a lender’s credit towards a buyer’s closing costs. What this means is for a slightly higher rate, lenders can give borrowers cash credit to cover their closing costs.
Case Scenario on Seller Concession and Lender Credit on Closing Costs on House Purchase
For example, say a borrower gets approved for a $200,000 mortgage loan at a 4.25% mortgage rate. Say the closing costs are $5,000. The mortgage lender can offer to give a lender credit of $5,000 towards the borrower’s closing costs at a rate of 4.75% in lieu of the 4.25% original par rate. Click here to find a lender for Mortgage Loans
How Does Lender Credit Towards Closing Costs Work?
Maybe at a rate of 4.5%, the lender’s credit amount might be $2,500. Borrowers can elect to choose the 4.50% mortgage rate and get a $2,500 lender credit and pay $2,500 out of pocket to cover the $5,000 in closing costs. Some of the fees and costs are related to the borrower’s mortgage loan application. Examples of the above costs and fees are the expense of a credit report on all applicants and rapid rescore fees and costs.
What Are Other Potential Closing Costs on House Purchase
Not every house transaction has the same type of closing costs. Closing costs is not a fixed percentage amount like the down payment. Closing costs varies per borrowers, the state, the county, and even the township. Other potential fees and closing costs on house purchase that are related to the subject property itself, such as the following:
- Homeowners Association (HOA) Fees
- Description: If the property is part of a homeowners association, you may need to pay initial HOA fees at closing.
- Purpose: Covers community amenities and maintenance.
- Pest Inspection Fee
- Description: The cost of inspecting the property for pests such as termites.
- Purpose: Ensures the property is free from infestations that could cause structural damage.
- Flood Certification Fee
- Description: The cost to determine whether the property is in a flood zone.
- Purpose: Loaners are required to assess the need for flood insurance.
- Survey Fee
- Description: The cost of having the property boundaries professionally surveyed.
- Purpose: Confirms the property’s legal boundaries and identifies any encroachments.
- Attorney Fees
- Description: Fees charged by a real estate attorney for handling the legal aspects of the process.
- Purpose: Ensures the legal transfer of property and proper documentation.
- Prepaid Interest
- Description: Interest that accumulates on your mortgage from the closing date until the month ends.
- Purpose: Covers the interest due for the initial period of your loan.
- Private Mortgage Insurance (PMI) Premium
- Description: If your down payment is less than 20%, an upfront premium for PMI is required.
- Purpose: Protects the lender in case you default on the loan.
- Home Warranty Fee
- Description: The cost of purchasing a home warranty plan.
- Purpose: Covers repairs or replacements of major home systems and appliances.
- Courier and Mailing Fees
- Description: Fees for sending documents related to the closing process.
- Purpose: Ensures timely delivery of important paperwork.
- Recording Fees
- Description: Fees charged by the local government to record the new deed and mortgage.
- Purpose: Officially documents the transfer of property ownership.
- Title Search Fee
- Description: The cost of thoroughly examining public records to confirm the property’s legal ownership.
- Purpose: Ensures there are no outstanding claims or liens against the property.
- Transfer Taxes
- Description: Taxes the state or local government imposes when the property is transferred to a new owner.
- Purpose: Generates revenue for the government.
- Credit Report Fee
- Description: The cost of pulling your credit report for the loan application.
- Purpose: Assess your creditworthiness for the mortgage.
- Mortgage Broker Fee
- Description: Fees paid to a mortgage broker for finding and securing a loan.
- Purpose: Compensates the broker for their services in arranging the mortgage.
How Much Are Closing Costs on Home Purchase Loans
Unless the home seller offers to pay closing costs by giving home buyers a seller concession towards the home buyers closing costs. These expenses are charged to the buyer and often run between 2 and 3 percent of the amount being borrowed. In Illinois, the seller can assist up to 6% in seller concessions of the loan amount in paying the closing costs for the buyer on FHA Home Loans.
Maximum Closing Costs Cap Depends on the Mortgage Program and Occupancy Type
The maximum seller concession allowed on an owner-occupant or second-home conventional loan is a 3% seller concession. The maximum closing cost allowed on an investment property conventional loan is a 2% seller concession. The maximum closing cost allowed on a VA Loan is 4% seller concessions.
Using Lender Credit Versus Getting Higher Rate To Cover Closing Costs
Closing costs can be paid by the lender for a higher interest rate too through a lender’s credit towards closing costs. Because different states have different fees and taxes that are a part of these costs, it’s impossible to generalize nationwide
Examples of Closing Costs on Home Purchase Loans
Common closing costs can include the following:
- Processing and underwriting fee
- Mortgage insurance premium
- Home appraisal fee
- Credit report fees
- Tax service fees and application fees for third-party vendors
- Recording fees for the county
- Transfer stamps
- Title charges
- Commitment
- The wire transfer fee, etc.
- Escrow accounts are often required for homeowners insurance, real estate taxes, and homeowners associations
- Escrows require cash deposits at closing
- Pre-paid is part of closing costs on house purchase loans
Once a mortgage loan applicant applies for a mortgage with a loan officer. the loan officer will send out the Loan Estimate, which replaced the old Good Faith Estimate. On the LE, it will have all estimated closing costs. Most closing costs disclosed on the Loan Estimate are over-disclosed. Connect With Our Loan Officer for Home Purchase Loans
Lender Credit For Closing Costs on Home Purchase Loans
The team at Gustan Cho Associates can help borrowers who are short on closing costs on house purchase loans by covering the shortage of the costs with a lender credit. This way borrowers do not have to come with any money out of pocket. For most of our borrowers who refinance with us, there are no closing costs on refinances because we cover the closing costs on house purchase.
Frequently Asked Questions (FAQs)
- What are closing costs?
Closing costs are the fees and expenses you pay when finalizing a real estate transaction. These costs typically include loan origination fees, appraisal fees, title insurance, and escrow fees. - How much are closing costs for a house purchase?
Closing costs for a house purchase generally vary between 2% and 5% of the loan amount. The exact amount depends on various factors, such as the location of the property, the lender’s fees, and other specific transaction-related expenses. - What are common closing costs for a home purchase?
Common closing costs for a home purchase include:
Loan Origination Fees: The lender imposes these to handle the loan application procedure.
Appraisal Fees: The expense of having the property evaluated by a professional appraiser.
Title Insurance: Shields against any problems related to the property’s title.
Escrow Fees: Fees for the escrow service managing the transaction.
Home Inspection Fees: Cost of a professional home inspection.
Property Taxes: These may require payment upfront.
Homeowners Insurance: Typically required to be paid for the first year upfront.
Recording Fees: Imposed by the local government to document the property transfer. - Are closing costs different for refinancing a mortgage?
Yes, closing costs for refinancing a mortgage can differ from those for a home purchase. While many of the fees are similar, the total amount can vary. Refinancing closing costs typically include loan origination fees, appraisal fees, title search and insurance, and recording fees. - Can closing costs be negotiated?
Some closing costs can be negotiated. You can request the seller to cover part of the closing costs in a home purchase. Additionally, you can shop around for services like title insurance and home inspections to get better rates. - Can closing costs be included in the mortgage?
In certain situations, closing costs can be included in the mortgage. This is more common in refinance transactions, where lenders may offer a no-closing-cost refinance in exchange for a slightly higher interest rate. - Are there any programs to help with closing costs?
Yes, there are programs designed to help with closing costs. Numerous states and local governments offer first-time homebuyer programs that help with closing costs. Additionally, some lenders offer specific loan products that include closing cost assistance. - How can I estimate my closing costs?
You can approximate your closing costs using online calculators or obtain a Loan Estimate from your lender. This document offers a detailed breakdown of the anticipated costs you must pay at closing.
What is a Loan Estimate?
A Loan Estimate is a document the lender provides within three business days of receiving your loan application. It outlines the key terms of the loan, including the estimated closing costs, interest rates, and monthly payments. - What is a Closing Disclosure Statement?
This statement outlines the final details of your mortgage loan. It includes the loan terms, projected monthly payments, and the exact amount of closing costs. You will receive this document three business days before your closing date.
Mortgage Lenders For Bad Credit With No Overlays
Home Buyers who need to qualify for a mortgage with a mortgage lender for bad credit with the best VA mortgage loans with VA mortgages as well as no overlays on government and/or conventional loans please contact Gustan Cho Associates at 800-900-8569 or text us for faster response. Or email us at gcho@gustancho.com
. The team at Gustan Cho Associates is available 7 days a week, on evenings, weekends, and holidays.
