If you have ever bought a home, then you probably know about closing costs. But if you’re buying a house for the first time, you might be surprised to learn that you owe more than a down payment. Buyers must also pay closing costs in addition to their down payment and their real estate agent or realtor commission. At this point, you might be wondering “how much are closing costs for home buyers?” When purchasing property as a first time home buyer, you need to know exactly what closing costs are and how much you will pay. You should also look into how you might be able to get your closing costs paid by someone else. For example, closing costs are usually split between the buyer and seller – though the buyer usually covers more costs than the seller. Your total number, amount and type of closing costs will vary depending on which state you live in. As such, first time home buyers should check with their real estate agent and mortgage lender before closing costs come due. From appraisal fees to underwriting, follow below to learn more about common closing costs paid by home buyers.
What are closing costs?
When buying a home, there are costs in addition to the purchase price at the closing. (The closing is the final stage of the home buying process. The buyer and seller sign the necessary documents, funds are released from the escrow account and the transfer of property ownership happens). For first time homebuyers, it might be surprising that there are usually thousands of dollars in additional money owed at closing. Also called settlement costs, closing costs are expenses incurred by both buyers and sellers during the final stage of the home buying process.
In general, closing costs are the expenses associated with buying or selling a home, excluding the cost of the home itself. This means that home buyers owe extra money in addition to their down payment. Most closing costs are tied to your loan amount and/or your home’s purchase price. These costs are paid to those who perform services for the buyer and seller during the home buying process. Service providers include real estate agents, mortgage loan officers and insurance providers.
Most attorneys, realtors and lenders require buyers to pay certain closing costs. For example, closing costs may include appraisal fees, attorney fees (varies by state), and title insurance. The full list of fees and amounts is broken out in our Torii Closing Costs Calculator, which you can find here. Learn all about typical closing costs and other closing costs below.
Common Closing Costs Due at or Before Signing
Borrower’s Title Insurance
When purchasing a home, most buyers will pay for title insurance in order to protect their mortgage lender from fallout from a bad title. Sellers also obtain title insurance. According to Realtor.com, buyers across the country typically pay about $1,000.00. However, the average California home buyer will only pay a little more than $500 at closing. The premium of your title insurance policy could be variable, depending on the state in which you buy your new house. However, some state governments fix title insurance premiums, meaning you cannot shop around for a better deal. In her article “Title Insurance: What You Need To Know” for Rocket Mortgage, Victoria Araj explains why buyers need the protection these policies provide.
What Do Title Insurance Policies Cover?
Araj writes that “most title insurance policies cover all the common claims filed against a title, including outstanding liens, back taxes and conflicting wills.” For first time homebuyers unfamiliar with real estate jargon, a lien is a creditor’s legal claim to an owner’s property. This property can be a house, a car or another type of asset. Liens function as collateral when a property owner is in the process of paying back a debt. Most liens are in the public record and will be discovered during title research.
Liens represent just one type of complication that could make your title “bad” and “spoil your legal ownership” of your new house. As Araj notes, “the last thing you want is to put down money, only to find that some unexpected issue renders the title invalid.” Taking out a title insurance policy protects home buyers from losing their legal rights to the house they just bought. Each home buyer who takes out a title insurance policy pays their premium at or before the closing date.
Differences Between Owner’s Title Insurance and Lender’s Title Insurance
Home buyers may purchase one of two types of title insurance policies. These include an owner’s title policy and/or a lender’s title policy. Your mortgage broker will almost always require you as the buyer to obtain a lender’s title insurance policy before finalizing your loan agreement. Lender’s title insurance policies are less comprehensive than owner’s title insurance policies, as they are designed only to protect the lender.
Owner’s title policies protect home buyers from many other risks. These include “conflicting ownership claims, “outstanding lawsuits, liens and other encumbrances,” “erroneous or flawed records,” “outright fraud or forgery” and “undisclosed easements.” Your lender will not require you to obtain an owner’s title policy but many buyers choose to do so for the extra protection.
Title Search Fees
Though sellers usually pay title search fees, buyers sometimes cover these closing costs instead. Typically costing between $100 and $1,000, title search fees are part of the application process for title insurance. During a property title search, a title company or real estate attorney will go through documents related to the home’s legal history. As mentioned above, liens and elements that could complicate your right to ownership will usually come up during a title search.
Tax Status Research Fees and Tax Service Fees
Marguerita Cheng and Patrice Williams explain these fees in their article “Closing Costs” for Investopedia. According to Williams and Cheng, buyers must also pay a tax status research fee and/or a tax service fee. Cheng and Williams write that this is a third-party fee “to keep tabs on your property tax payments.” If there are any issues with your property tax payments in the future, your lender will be notified.
Lender Underwriting Fee and Loan Origination Fee
Lenders often charge buyers an underwriting fee to compensate them for processing your mortgage loan. In her article “Underwriting Fees Associated With a Mortgage” for SF Gate, Karina C. Hernandez elaborates. Hernandez writes that lenders often charge underwriting fees in place of origination fees. Some will add underwriting on top of the origination fee. A loan origination fee typically covers “administrative services such as loan processing and mortgage broker fees.”
Unlike origination fees, underwriting fees are often considered “junk fees.” Hernandez writes that junk fees are “excessive lender fees for processing and documentation.” If your lender charges an underwriting fee in addition to your origination fee, you might be facing junk fees. If your underwriting fee is listed in your loan fee disclosure or HUD-1 as more than $1,000, it is probably a junk fee.
Settlement Fee
The company that transfers the title of your new home from the seller to the buyer typically charges a title settlement fee in exchange. Sometimes called an escrow fee, this charge is intended to cover administrative costs related to transferring the title. The title settlement fee is tied to your loan amount or the price at which you purchased your new house. As such, your title settlement fee will be more if you buy an expensive house and less if you buy a cheaper house. Usually, the title settlement fee costs no more than a few hundred dollars.
Appraisal Fees
When applying for a mortgage loan, lenders always require prospective home buyers to pay for an appraisal of the house they wish to purchase. Your home’s appraiser will determine if the asking price or listing price for the house is equal to its market value. House appraisals usually cost no more than $500, though an appraisal could cost more for a particularly large, remote or complicated house. Appraisals usually happen only after the current homeowner (seller) has accepted the prospective buyer’s offer and is preparing to close. Most appraisals will happen after inspections because information from the inspection is needed to accurately estimate the home’s market value.
Recording Fees
While either the seller or the buyer could pay recording fees, these charges are usually incurred by the new homeowner. These fees are charged by state and local governments in exchange for registering the sale of your new house. According to Julia Kagan in a recent article for Investopedia, “recording fees are paid for affidavits, leases, mortgages…changes of title, deeds, and others.” Though the amount owed for recording fees varies from county to county, the average payment is around $125.00. Recording fees rarely exceed $200 and many county assessors prohibit charging over a certain amount. At the same time, you will likely incur notary fees as a notary must be present to certify your signature on all closing paperwork.
Land Survey Fees
In addition to your appraisal and home inspection fees, you might be required to pay for a land survey by your mortgage lender. Land surveys are effectively maps with a precise accounting of all property boundaries, structures and/or easements. Aly J. Yale explains why some lenders require surveys in “Do You Need a Land Survey?” for The Balance. Yale writes that “an up-to-date land survey is usually required by mortgage lenders.” These surveys “confirm the boundaries and contents of the land they’re financing and to ensure it’s worth the funds they’re lending you.” Buyers who are paying cash – i.e. not applying for a mortgage to cover their purchase – can skip this step.
Home buyers are typically advised to proceed with a survey even if they can legally avoid doing so. This is because “land surveys clearly define the boundaries of what you own and ensure your property is in compliance with local zoning regulations.” Knowing all this information about your property can “help you steer clear of disputes with neighbors and nearby property owners.” On average, land surveys cost about $500.00. This amount could increase if your property is difficult to access, far from the surveyor’s office or topographically complex.
Credit Report Check Fees
Another closing cost associated with your mortgage, a credit report fee is incurred each time your lender pulls your credit reports. Lenders often pull credit reports a few times during the home buying process. They do so to ensure there have been no material changes to your financial situation. Certain changes to your credit score during this time could invalidate your loan offer.
According to the Consumer Financial Protection Bureau, credit report fees are the only fees lenders can request before they provide a loan estimate. Most credit report fees are under $30.00. In our post “Nine Tips for First-Time Home Buyers,” we note that home buyers should shoot for a 760 or above credit score. This will help you qualify for the lowest interest rate on their mortgage.
Courier Fees and Wire Transfer Fees
When sending physical copies of documentation related to their home loan, buyers might incur a courier fee. This fee usually amounts to no more than $30. Upon closing the sale of your new home, you might also incur wire transfer fees. These fees are charged by your mortgage lender after they deposit funds from your loan into escrow.
Flood Certification Fees
Many mortgage lenders require buyers to pay flood certification fees, which usually cost around $15.00. Before agreeing to offer you a loan, mortgage lenders want to know if the home you wish to purchase is in a flood zone. Flood zones are areas in which there is a high risk of flood damage to local properties. The government assigns flood zones based on historical data. If this data shows your new home is in a flood zone, you must pay for flood certification and for flood insurance.
Loan Application Fees
If you plan to buy a house with money from a lender, you might incur loan application fees which can be hefty. Depending on the lender, an application fee could be a few hundred dollars. Application fees are often considered “junk fees” and are not charged by all lenders.
Mortgage Assumption Fees
Some home buyers will also pay an assumption fee at closing. Gregory Erich Phillips explains in his article “Fees When Assuming a Mortgage” for The Nest. Phillips writes that an assumption is when the buyer “takes over all the terms…on the seller’s mortgage on the property.” Home buyers often choose assumption over applying for a brand-new mortgage when current interest rates are high. According to Phillips, “assumption fees are much lower than fees on a standard loan.” While your lender will charge “for their incidental costs…the total of these fees will likely be less than $1,000.”
On top of incidental costs, lenders will charge what Phillips calls a “‘flat assumption fee.’” Flat assumption fees are limited to a certain amount for FHA loans or VA loans but not for conventional mortgages. Phillips notes that “the maximum allowed fee for FHA is $900 [and] VA assumption fees are $300 plus the cost of a credit report.” As you might imagine, buyers who do not assume an existing mortgage from the current homeowner will not pay assumption fees.
Guarantee Fees
Next are guarantee fees. Though guarantee fees are owed by lenders of government backed mortgages to GSEs, these fees are usually passed on to the home buyer. They typically amount to around 1% of the total loan amount. G-fees might also be a fixed amount, though this is less common. Sometimes, guarantee fees are bundled in with a mortgage’s interest rate and are paid monthly by the home buyer. In an article for Investopedia, James Chen explains why buyers pay guarantee fees. According to Chen, “this charge helps the issuer pay for administrative costs and expenses related to the security.” Guarantee fees also “cut down on any risk or loss that may arise if any of the mortgages that back the security default.”
Homeowners Insurance Premium
All buyers who take out a mortgage must pay their homeowners insurance policy at closing. Karina C. Hernandez explains in her article “Advantages & Disadvantages of Paying Your Homeowner’s Insurance Up-Front or at a Closing” for SF Gate. Hernandez writes that mortgage lenders require buyers to “secure and prepay a premium that fits its minimum standards for coverage.” How much you pay at closing is dictated by your loan amount. If you prepay your homeowners insurance at closing, you “guarantee coverage for the first year of homeownership.”
Mortgage Broker Fees
If you work with a mortgage broker, you might pay broker fees. Broker fees are usually between half a percent and nearly three percent of your mortgage loan principal. Federal law prohibits mortgage brokers from charging more than 3% in broker fees.
Mortgage Discount Points or Discount Fees
Of all the closing costs on this list, first time home buyers might be the least familiar with mortgage points. Upon closing, some home buyers will choose to purchase discount points in order to decrease the amount of interest they owe on their mortgage. Some lenders refer to this as “buying down” the mortgage’s interest rate. Libby Wells explains how discount points benefit home buyers in her article “Mortgage points and how they can cut your interest costs” for Bankrate. Wells writes that “each point the borrower buys costs 1 percent of the mortgage amount.”
As such, buying one discount point on your $500,000 mortgage would cost you $5k. Each point you buy usually lowers your interest rate by a quarter percent. This means that “one point would lower a mortgage rate of 3% to 4.75% for the life of the loan.” However, this rate does vary between lenders. Home buyers are allowed to purchase as little as a quarter point and as many as four points.
HOA Annual Assessment Fees
If you buy a house in a gated community, you might owe HOA annual assessment fees upon closing. These cover any expenses incurred by the homeowners’ association that are not part of your regular monthly payment.
Real Estate Attorney Fees
Depending on your state, you might need to hire a real estate attorney to handle closing. Attorneys usually charge either a flat fee or an hourly fee. Buyers should expect to pay anywhere between a few hundred dollars and a couple of thousand dollars to their real estate attorney at closing.
Note: In Massachusetts you need a real estate attorney to prepare the closing documents and conduct the closing. In California, you don’t need a real estate attorney, so do not include this fee.
Additional Closing Fees: Prepaids or Impounds
Additional monies are exchanged at the closing and are referred to as “prepaids” or “impounds.” These include prepayment of each monthly payment associated with your mortgage as well as insurance for more than one month. Impounds also include:
- 30-day prepaid interest
- Taxes payable at closing
- There are a number of taxes due at closing — including upfront property taxes. When buyers pay property taxes at closing, they may also pay transfer taxes.
- Hazard homeowners insurance premium
- Hazard insurance escrows
- Private mortgage insurance PMI premium / Private mortgage insurance payments
- Prepaid mortgage interest. Check with your accountant to see if your mortgage insurance payments are tax deductible.
- Your first monthly mortgage payment
… But who pays the real estate agent?
If you are selling a property, your closing cost fees mostly relate to real estate agent commissions and the transfer of the deed. The buyer costs are mostly associated with their mortgage. Real estate agent commissions for buyers are separate from closing costs.
How much should I expect to pay at my closing?
Closing costs in all states vary by the purchase price of the property. Find out more about what you might owe through Torii’s Closing Cost Calculator, which is a useful tool to estimate what your costs might be.
How Do I Pay for Closing Costs?
The median home price in America was $374,900 as of July 2021. In California, the typical home value was $722,406. For Massachusetts it was $535,000 and in New Hampshire it was $357,000.00. According to Bankrate, the five states with the highest average closing costs before taxes are Washington DC, Hawaii, New York, California and Illinois. With taxes included, states with the highest average closing costs include DC, Delaware, New York, Maryland and Washington State. New Hampshire and Massachusetts are somewhere in the middle. Because buyers pay the majority of closing costs due at signing, home buyers in California should expect to pay between $14,000 and $36,000. Most Massachusetts buyers will pay between $10,000 and $27,000 while New Hampshire buyers will likely pay between $7,000 and $18,000 in closing costs alone.
Keep in mind that your lender is required by law to provide you with an itemized list of all mortgage-related closing costs you owe. Your mortgage broker should give you a list of estimated closing costs when you apply for your loan. Shortly before closing, your broker will give you an updated list as part of the closing disclosure documentation with all costs expressly delineated. But how and when do buyers pay closing costs – and what do they do if they cannot afford to pay all at once?
Buyers Can Pay Closing Costs All At Once or Over Time
In their article “Mortgage Closing Costs: How Much You’ll Pay” for NerdWallet, Deborah Kearns and Barbara Marquand explain exactly when buyers pay. They write that “the most cost-effective way to cover your closing costs is to pay them out-of-pocket as a one-time expense.” Of course, paying closing costs up front is untenable for many home buyers – especially those paying upwards of $20 or $30k in closing costs.
Thankfully, there are a few options other than paying up front at signing. For example, some lenders will allow homeowners to include closing costs in their mortgage loan. However, buyers who choose this route then have to pay interest on closing costs “through the life of their mortgage.” Alternatively, there are a couple ways to lower your closing costs.
Ways to Lower Your Closing Costs
While many closing costs are standardized, others are negotiable. In their article “How Much Are Closing Costs? Plus: How to Avoid Closing Costs” for Realtor.com, Judy Dutton and Chrystal Caruthers explain. They write that “attorney fees, commission rates, recording costs and messenger fees” are all negotiable. Speak with your mortgage broker, real estate agent and assessor-recorder about lowering these fees before settlement. Consider shopping around for attorneys, lenders and realtors. Getting quotes on closing costs from multiple lenders will allow you to find the best deal. Once you receive a loan estimate from your mortgage broker, make sure you go through the document with a fine-tooth comb. Your broker might have padded the estimate with duplicate or unnecessary fees in order to up their commission. Buyers can also lower fees related to homeowners insurance and other monthly payments by shopping for cheaper policies that offer similar coverage.
In a buyer’s market where sellers are at a disadvantage, you might be able to get the seller to pay for some closing costs. This is not usually a viable option in a seller’s market where buyers are at a disadvantage and are usually competing for property. Another way to reduce closing costs – especially those related to prepaid mortgage insurance, interest and other premiums – is to delay closing. Dutton and Caruthers write when you “close at the beginning of the month, you have to pay the per diem interest” until the end. If you ask the seller to close on the last day of the month, you pay for only a single day of interest. If you apply for a VA loan, FHA loan or other government backed mortgage, your closing costs could be less by default.