Closing Costs Explained

Determining the minimum down payment is quite simple-- it's usually a percentage of the purchase price depending on the loan program. For instance, it's a minimum of 3% for conventional loans, 3.5% for FHA, and zero for USDA and VA loans.

The buyer's portion of closing costs can be more complex, typically ranging from 2% to 5% or more of the sale price.

In certain situations, the seller or the lender might cover a portion or even all of these fees for you. However, remember that if the seller covers a buyer's fees through a closing cost credit, it could impact your sales contract offer and negotiating position, especially in a competitive seller's market (where sellers hold most of the negotiating power due to more buyers than available listings). When a lender covers some or all of your closing costs, your interest rate and monthly payment are usually higher.

More on closing costs

Closing costs are a collection of fees required to set up and close a new home purchase along with a mortgage. They can range from 2% to 5% of the sales price for a home purchase transaction and 2% to 4% for a refinance loan. The sales price of a home will affect this percentage of closing cost range with a larger sales price being on the low end of that 2% to 5% range. On a Refi loan, closing costs will be less since many of the costs associated with a sale aren't found with a refi.

Closing fees include everything charged by your lender, home appraiser, escrow company, title company, home insurance company and other third parties involved in the mortgage and sale part of the transaction.

The settlement agent--in California an Escrow company --will collect these closing cost fees and distribute to the respective parties at closing. some fees like appraisal, inspection fees and occasionally home insurance premiums are prepaid prior to closing by the buyer and they would be reflected as a paid outside closing (POC) item and credited on the closing statement.

Closing costs can differ depending on the region and the service providers involved. In Northern California, the major title and escrow companies, which are usually combined, tend to charge similar fees. In Southern California, however, escrow providers operate independently and contract with a title company for title services. **Over the years, I've observed that an independent escrow company offering closing services—one that isn't affiliated with a title company—usually charges significantly higher fees, often by thousands of dollars.** Therefore, transactions in Southern California are likely to incur higher title/escrow closing costs.

Below are the typical closing costs you should expect with a purchase transaction.

Lender fees

These fees can range widely based on the lender chosen and if paying points to achieve a lower rate. Here are some typical lender fees:

• Loan origination fee

• Loan garbage fees, such as processing, underwriting, and administrative fees, are often charged by larger lenders, particularly online lenders and many banks. Quick tip: These lenders tend to "hide" these fees during verbal discussions when quoting rates and points. For instance, they might quote a rate with "zero" points (each point is 1% of the loan amount) but omit mentioning these garbage fees, creating the impression that they are cheaper than a lender who discloses "all lender" fees. Once you apply and receive a loan estimate, these garbage fees will appear under the origination section on page 2, box A, of the loan estimate. These garbage fees can amount to thousands of dollars.

• Appraisal fee--this will vary based on the transaction, property type, property location and loan type. In rural areas of Northern California --for a conventional loan -- you can expect something around $675 since fewer appraisers service these areas and often an appraiser will travel greater distances to visit the property. In urban areas appraisal fees will often be less. Quick tip -- On conventional loans that meet certain criteria an appraisal may not be needed, thus saving this fee.

• Lenders will also pass on some other fees to a buyer, like credit report fees, tax service, flood cert, a MERS fee, among others. These fees usually amount to less than $200 combined and a lender is not allowed to "mark up" these fees to more than what they actually cost the lender.

Government loans have additional fees that are typically financed into the loan. Keep in mind government loan rates are typically much better than conventional so having to pay or finance these fees may not be a deal breaker. An experienced loan officer can compare various loan program benefits for you based on your unique scenario.

Example of these financed fees:

• FHA upfront mortgage insurance premium -1.75% of the loan amount and monthly mortgage insurance depending on the loan to value and term

• USDA has a 1% Guarantee fee added to the loan as well as a monthly fee --currently .35% of the loan balance

• VA funding fee will range from 1.25% to as much as 3.3% of the loan amount -depending on previous usage and if there is a down payment --added to the loan-- unless the veteran is exempt from paying the funding fee

Title and Escrow company fees

These fees will be dependent on the sales price, loan size, sales contract terms (who pays for what) and the property location, as well as what is customary for the buyer and the seller to pay in that region. Typically a buyer's fees for these services will range between $3k and $5k or more. An experienced lender should be able to more accurately estimate this range once they see a signed sales contact as well as know the title/escrow company chosen by the buyer and seller.

Home insurance

As the buyer, you select your insurance provider. The annual premium for the first year is either paid by you or collected and paid by the escrow/title company at closing. Home insurance premiums vary based on the home's location, size, property features, and even the buyer's insurance loss history. In the Northern California foothills, premiums can range from $2,000 annually to $7,000 or more. Buyers in the foothills or mountains often need to use the California Fair Plan, the state's "last resort" high-risk insurance program. For more information, consult your chosen insurance agent or visit this link https://www.cfpnet.com/

Impound account setup

Certain loan programs, such as FHA, USDA, or conventional loans with less than a 5% down payment, require mandatory impound escrow accounts. In these cases, the lender gathers reserves and includes 1/12 of the annual property taxes and home insurance in each monthly payment. The reserve amount varies depending on the transaction's closing time, the sales price, and the annual home insurance premium. A reasonable estimate would be 6 months of taxes and 3 months of the annual home insurance premium. For a $500,000 sales price with a $3,500 annual home insurance premium, an estimated $4,000 might be needed to establish this reserve account. For conventional loans with at least a 5% down payment or a VA loan, impound accounts are generally optional, subject to the lender's policy (as lenders can often set their own rules). Without an impound account, the buyer directly pays all property tax bills and the home insurance renewal premium, resulting in a lower monthly payment since these are not collected by the lender.

Prorated property taxes

Depending on when a transaction closes the seller may have either prepaid the property taxes or they would be paid on the seller's behalf at closing. If this occurs, you the buyer would have a charge--called a proration-- of these prepaid taxes based on how many days the seller has prepaid them. Typically, the larger the amount of prorated taxes you are charged, proportionally less property taxes are collected in the impound account reserve.

Other transaction fees

Fees for buyer paid inspections like home inspection, septic or well, or pest inspections may be charged depending on the transaction and the buyer's wishes. If the property is within a HOA there will typically be HOA transfer fees and possibly a proration of previously seller paid HOA fees.

There may be additional fees charged to the buyer not included above, however these are the most typical.