When you’re buying or selling a home, there is the price of the home called the “sales price” and the cost of the transaction, called “closing costs”; in this article we will be talking about the buyers set of closing cost.
Closing costs—which can typically be calculated to about 2% to 5% of the home’s purchase price and added to the down payment – can be a major expense. Michael Hyman, a research data specialist at the National Association of REALTORS®, shares the charges that make up closing costs on the association’s ‘Economists’ Outlook’ blog so that home buyers can be prepared. The following has been altered to fit home purchasers in the state of Michigan, credit is given to Mr. Hyman of the National Association of Realtors.
Lenders provide a Closing Disclosure at least three business days prior to closing on a mortgage. But buyers will need to budget for these added costs ahead of time to avoid sticker shock days before closing. A Closing Disclosure is the final set of costs and various fees all totaled together and presented on one document, it’s purpose is to insure that a purchaser is aware of the closing figures at least three days before closing. The lender’s Loan Officer will give the purchaser a Loan Estimation at the time of the loan application. The Closing disclosure will have a side-by-side comparison of your estimate and the final calculation.
Down Payment. Down Payments, the tricky little things are sometimes not considered a closing cost, and sometimes confused with Earnest Money Deposits; down payments usually make up the largest amount of money the purchaser will have to bring to the closing table. Different categories of loans called ‘loan types’ have different minimum percentages for its down payment ranging from 0% all the way up to 15% residential. (It would be good to note here that 20% is not mandatory for home loans in most cases). The four common loan types are:
“VA” allows 0% down
“FHA” allows 3.5% down
“USDA” allows 0% down but only qualifies in designated rural areas
“Conventional” allows 5% down but have moved to a minimum of 3% down for first time home-buyers.
Origination fees. This is the fee charged by lenders for processing the application and underwriting it. The fee typically ranges from about 0.5% to 1% of the borrower’s mortgage. Sometimes, it’s higher for smaller loans because “the fixed costs are a higher percentage of a smaller balance,” Your Loan Officer will have a breakdown of all of the itemized expenses you’ll be charged by their company. Often not enough questions are asked at this stage, you’ll want these figures to compare whats called the APR this is the cost of doing business with this lender for this transaction.
Service charges. These include items such as the appraisal, credit report, flood determination and certificate, tax status, pest inspection, title search and insurance, and survey fees. Appraisals and surveys can cost anywhere between $400 to $600 each. Title services can vary, and will include the mortgage premium which insures your loan against someone claiming interest in your home and the settlement fee, the settlement fee is what’s owed to the title company for its overall service.
Escrow items. Homeowners insurance, property taxes, and primary mortgage insurance (if applicable) also are added fees. These items are collected monthly and paid yearly by your lender’s servicer, but at closing you’ll have to set up what’s called the escrow to catch the lender up to the yearly payment. I’ll discuss this further in a separate post. For now be aware that this is one of your closing costs.
Tax Prorations. In the state of Michigan property taxes are paid in advance. There are two sets ‘County and City’ taxes; both paid on cycles, either Summer or Winter. When a home is bought the purchaser has to reimburse the seller for taxes that were already paid for ahead of time, starting at the closing date. Sounds confusing sometimes but its really simple.
Ex… If the tax cycle is June 2019 to June 2020 and the taxes were paid by the seller, and the purchaser comes along and buys the home in February 2020, then at closing the purchaser will owe the seller a Tax Proration from the day of close to the end of the tax cycle because the home and the taxes belong to the purchaser now.
Transfer taxes and recording fees. Transfer taxes in the state of Michigan total 0.86% of the sales price of the home usually paid by the seller but in some cases such as New Construction and foreclosed homes you’ll see the transfer tax negotiated as a buyers expense so be aware.
It is also important to note that there will be several out of pocket expenses before closing day such as paying for your personal home inspection, and your appraisal as well as your homeowners insurance. Your Earnest Money Deposit although not an expense does come form your savings to be used later as part of funds that you have already paid, purchasers should be aware of these things so that they are not caught off guard and spending money they counted to go towards closing costs on these items.
Source: “Upfront Cost of Buying a Home,” National Association of REALTORS® Economists’ Outlook (Jan. 16, 2020)