When you buy a home it's common knowledge that you'll need some sort of down payment for the loan - whether it be 3.5%, 10%, 20% - or even sometimes 0%, depending on your type of loan. But sometimes we forget that there are other out of pocket charges that will come up in order to get your home bought.
Closing costs are typically 2-3% of your purchase price. Let's break down what makes up those costs.
1. Home Inspection
I highly recommend having a home inspection done on the home you are wanting to purchase. An inspector is a neutral 3rd party who will go through and "check under the hood" and "kick the tires" of the house. He will let you know what's good and what may need attention on the home - from a bad roof, to possible foundation issues, to leaking pipes. The typical inspection is around $300. The price will vary a bit depending upon who you hire and if you want any extras checked - i.e. mold, radon, meth, etc.
If you're getting a loan, your lender will require an appraisal on the home to make sure that it's worth at least the amount they are lending to you. It will also let you know that you are not overpaying for the house. An appraisal will cost around $500. You pay this to your lender and they will tell you the exact amount when they give you the initial Loan Estimate. Some lenders will have you pay for it before the appraiser goes to the property and others will include it in your final charges when the loan closes.
3. Loan Fees
The fees charged by your lender will be the largest portion of the 3%. They include loan origination fees (usually 1% of the purchase price), credit check fees, flood insurance check fees, etc. There will also be daily interest charges from the day you close to the end of that same month. All of these fees will be quoted to you at the very beginning of the process by your loan officer. She will give you a Loan Estimate that will itemize out those amounts.
4. Home Owners Insurance
You will pay for the first year of Home Owners Insurance at the time of closing of the home. You get to choose the insurance company you use and shop for the best coverage and rate. My own insurance is about $650 a year.
5. Title Insurance & Fees
The lender will also require you to purchase a Lender's Title Insurance policy that protects the lender if a problem with the title crops up at anytime. The seller will purchase one for you as well. That one is more expensive and expansive than the one you will buy for the lender. The one the seller buys is about .5% of the purchase price. The one you will buy is less than that. I know the amount is set by law and based on the purchase price, but I'm not sure exactly how it's calculated.
In addition to the Title Insurance there will also be title fees for the document preparation, deed recording, etc. That is around $355 at my preferred title company.
Property taxes on your home here in Utah are due every November. When they are paid you pay eleven months (Jan-Nov) in arrears (back pay) and one month (Dec) in advance. Whomever owns the home when the bill is due pays for the taxes for the entire year. The seller credits the buyer for his portion of the property taxes at closing. So if you close on September 12th, the seller will credit you the taxes from January 1st to September 12th at closing. The only time it goes the other way is in November and December. If you buy a house after the year's taxes have been paid, you will credit the seller the taxes for the days you will own the house for the rest of the current year.
The lender will also collect money for the taxes for the escrow account on your loan. It's typically a little more than the amount the seller will credit you because they like to have a bit of a buffer in that escrow account. So the credit from the seller and the charge for the buyer will be close to a wash, but the lender's side will be slightly more.
7. HOA Charges
If you are buying a home, townhouse, or condo that is part of a Home Owner's Association (HOA) you will credit the seller some HOA dues at closing. A seller typically pays for a month's worth of dues at the beginning of the month. If you close on the 15th of the month, you are responsible for the dues for the last half of the month. That will show up as a closing cost to you on the Closing Disclosure when you go in to sign all your documents.
HOA's also often charge a transfer fee when a property changes ownership. Who pays the transfer fee is negotiated as part of the Real Estate Purchase Contract. Historically the buyer pays the transfer fees. These fees vary significantly from HOA to HOA. I've seen them as low as $75 and higher than $1000. Part of your Due Diligence in buying in an HOA is looking into these types of charges. If the fee is a really high one it is possible to try to negotiate for the seller to help pay for that fee.
8. Can a Seller Pay My Closing Costs?
Those are the main items that will come up for closing costs when you are buying a home. It is possible here in Salt Lake for buyers to ask sellers to pay for all or part of their closing costs. It's most common when buyers don't have the cash for both a down payment and the closing costs. It does usually mean that you may pay a little more for a house than you would if you paid your own closing costs. If a seller pays your closing costs, that takes away from the profit he gets on the sale of his home. This is definitely something that comes up and can be a negotiating point. If you are competing with other offers, the request could weaken your offer. I have discussions on the pros and cons of making this request with my clients all the time.
If you have questions about any of this or if you or anyone you know has any Real Estate needs let me know. I'm happy to help.