When budgeting for a new home, in addition to planning for moving costs and any new furniture you may need, make sure to add closing costs as a line item. While dreaming up how you are going to decorate is more fun, it is crucial that you set funds aside for your closing so you are not surprised when it comes time to sign the papers.
Today, we will discuss everything you need to know about navigating closing costs when you are buying a residential property.
What Are Closing Costs?
The closing is when the transfer of ownership happens with a home. There are contracts for both parties to sign and fees that must be paid in order for the sale to go through. These fees are generally lumped together under the term “closing costs,” even though they are paid to different parties. This can make understanding closing costs harder, though it does not have to be!
Closing costs are the different fees and expenses that are paid to the mortgage company; the title company; the city, county, or state; and your insurance company. They are separate from the loan principal, however; some are recurring costs like taxes.
There are some home-buying costs that I am not covering here, though you should definitely budget them. This includes your new homeowner’s policy premium, any attorney’s fees if you choose to hire one (you do not have to), and the cost of inspections that occur before closing.
Who Pays Closing Costs?
Certain closing costs are the responsibility of the seller, while others are the responsibility of the buyer. For this article, I am focusing on the costs that a homebuyer will be responsible for. Most of the financial burden at closing falls on the buyer since they are taking ownership of the home.
Depending on your mortgage lender and mortgage type, you may be able to have some of your costs rolled into your mortgage to reduce the amount you must pay on closing day. This is not an option for everyone, though, so it is better to budget for these expenses and to be prepared.
How Much Are Closing Costs?
There is no hard and fast number for how much your closing costs will be because they vary based on the price of the home, the local and state taxes, and your lender. Thankfully, it is possible to get a pretty accurate estimate from your lender when applying for a mortgage.
While there are calculators to help you determine how much you will need to pay at closing, these can be inaccurate. Rather than relying on them, check with your lender and Realtor. They will be able to provide you with better estimates based on the amount you are borrowing, the cost of the property, your credit, area property taxes, and other pertinent items.
Breaking Down Closing Costs
Your closing fees will be itemized so that you can see exactly what you are paying and why. If you have any questions at closing, you should feel free to ask them. Hopefully, though, your questions will all be answered beforehand so that you can confidently sign the closing papers on the big day.
Let’s dive into itemized costs. The following are some of the fees that you can expect to pay at closing.
Depending on your lender, you may be charged an origination fee on your mortgage. This is generally a percentage of the total loan and will vary depending on how large your mortgage is.
You will incur a fee when you buy a property that is not new. A lender uses this fee to have someone search through property records for the title of your potential home. This person ensures that there are no issues with the home’s ownership status or liens on the property.
Lenders want to protect themselves from issues with ownership that may arise after you buy your home. Title insurance guarantees protection in case of issues with the title of a home. Lenders typically require homeowners to purchase title insurance, which is often up to 1% of the loan amount.
Your lender will likely want to appraise the property to make sure it is worth the amount that you want to borrow. You will be responsible for paying for this appraisal.
In Florida, you do not need a lawyer to help you buy a property. However, you will need to pay a settlement fee that goes to the escrow or title company. This fee is generally around $300 to $600.
An underwriting fee covers the cost to review and verify your mortgage. This fee will vary by lender and you should be made aware of it beforehand.
During closing, you will need to pay property taxes. What you are actually doing is reimbursing the seller for the taxes they have already paid on the property that year. This is generally prorated so that if you buy a home in the 4th month of the year, the seller will be responsible for those first three months of taxes and then you will be responsible for the remainder.
Depending on your lender and the size of your down payment, you may need to secure private mortgage insurance (PMI). Generally, your first premium will be due at closing. Again, this is something that you will be aware of before the big day.
Unless you are paying cash for your home, you will likely need to pay for your home to be surveyed. This will also help you understand your property lines.
In addition to the title search, a lien search will be run on the property you want to purchase to look for any additional issues. You will be responsible for the costs of the search.
Outstanding Fees and Liens
If the seller has failed to pay their HOA fees or if the property you are purchasing has any liens against it, you may need to pay those at closing.
Documentary Stamp Tax
This is the transfer tax that you pay on your home. Right now, buyers must pay $0.70 for every $100 of their mortgage. This is paid to the Clerk of Court.
I know this is a lot of information. If you have any questions about the process of purchasing a home, let’s talk. Contact me and let’s get your home buying journey underway!