What are closing costs? 

Several factors influence your closing costs, and as a result, these costs are not set in stone and will vary from one home purchase to the next. As your closing date approaches, your lender will provide a closing disclosure for you to review. It may be the first time you see an itemized list of one-time fees you are expected to pay on closing day, these will be in addition to your down payment.

 Factors to include in your closing costs:

• The purchase price of the home
• Your down payment amount
• The type of loan you choose 
• Any adjustments you negotiate with the seller 

Typically, closing costs run between 2% and 5% of the price of your home. On a home purchased for $300,000, closing costs could range from $6,000 to $15,000, which is a significant range. 

How do closing costs affect a home purchase? 

This is an excellent question, one that more homebuyers need to ask. Before closing on the property, you have likely paid several fees already.

As part of your contract, you paid earnest money to secure the property. This payment showed the seller that you were a good-faith buyer who planned to move forward with the home purchase. Earnest money usually applies to the downpayment but can also be used for the closing costs. 

Here are the most common closing-related costs payable on the day of closing

Lender fees 

Lender fees include credit report fees, points, flood determination, homeowners insurance, and private mortgage insurance (if applicable). 

Third-party fees

These are fees charged by the title company to complete all of the necessary background checks on the property. The title company will perform a title search to ensure the seller is the actual owner of the property and to make sure there are no liens against the property or other issues that may prevent the sale. As part of this process, the title company issues title insurance to protect against past defects in the property’s title, such as forged documents, undiscovered heirs, or undisclosed liens—to allow for a clear title for purchase. Real estate commissions are also paid out to your agent and the seller’s agent at the final closing. These fees will show up on the closing disclosure statement.

Possible seller credits

For some home purchases, certain repairs identified in-home inspection reports do not get completed, or the seller offered an allowance for the new owner to complete the work after closing. These items will show up on your closing disclosure statement as a credit from the seller. In effect, such credits lower the purchase price and reduce closing costs. A typical allowance might be for new carpeting or new appliances. 

Is it possible for closing costs to change? 

Yes, your closing costs could change at the last minute. For example

• If the home appraises for less than the sales price, the buyer and seller may have to renegotiate the price. 
• A title search could turn up a problem such as a lien on the property. 
• If the interest rates jump, you may want to change the type of loan you take out as the buyer. You may also decide to pay more or less for a downpayment. 
• Before releasing final funds, the lender may find a new issue with your credit history. A situation like this could change the closing costs if you need to pay down a credit line with loan funds or if the credit issue affects your interest rate and points.

Can homebuyers receive assistance for closing costs?

There are many first-time homebuyer programs that can assist homebuyers with down payment and closing costs assistance. Many of these programs specifically serve first-time homebuyers, especially buyers with moderate and lower incomes. A first-time homebuyer is anyone who has not owned a home in the last three years. So, if you’ve owned a home previously, you might still qualify for one of these programs as long as you have not owned a home recently. 

As a homebuyer, you can also use monetary gifts from friends and family to pay for closing costs. Ask your lender about any gift letter requirements and limits on amounts. 

There are many fees and costs that make up the final closing costs when buying a home. Don’t let all of the numbers intimidate you. If you have questions, ask your lender, ask the title company, and ask your real estate agent to clarify. It is their job to help buyers and sellers finalize a property transfer. Just like you, they want the transaction to proceed smoothly – so you can move into your new home and begin enjoying your new space.