This is one of the most important topics to discuss with new buyers. I am always surprised when I talk to clients who have spoken to other mortgage lenders and have no knowledge that they will need money at closing outside of the down payment money. It is very important that a buyer understand the total costs upfront right from the beginning.
You generally will not incur any costs until you actually make an offer on a property. With your offer it is customary to give a $1,000 deposit to the seller also referred to as earnest money deposit or EMD for short. Sometimes borrowers give more than $1,000 to try and make the offer look stronger. The seller will return your check if the offer is not accepted but if the offer is accepted they will deposit your check and hold it until closing. Usually the attorney or real estate office actually hold the funds in an escrow account but the money is returned to you at closing to go towards your final figures due at the closing table.
After accepted offer a lot of buyers decide to do a home inspection. The inspection will usually cost you anywhere from $400-$800 and will be paid on the day of home inspection. Typically it is after home inspection we begin the actual mortgage application process and to submit the loan and order a 3rd party appraisal we collect a $499 deposit which is refunded to you at closing along with the other deposits you have given. The next deposit is given a few weeks after accepted offer typically when you sign the formal purchase agreement called purchase and sale. It is customary to give a 5% deposit (5% of the purchase price) minus the $1,000 you already gave. This money is held just like the initial offer deposit and refunded to you also at closing. (At this point you have the following funds coming back to you at closing towards your purchase funds. Offer deposit of $1,000, bank $499 deposit, and P&S 5% deposit).
The overall costs associated with a home purchase are as follows: (these will be provided to you upfront with loan application).
Closing costs (total fees to the bank, closing attorney, and state in which you buy)
Prepaids (city taxes, home insurance, and interest are all due upfront when purchasing)
Miscellaneous (optional title insurance coverage, and personal representation fees sometimes charged) A detailed breakdown of these items below:
A detailed breakdown of these items below:
Origination fee - This is the banks processing/underwriting fee charged to all borrowers.
Appraisal fee - Cost to do an appraisal which is required on almost every transaction
Tax service fee – Bank fee to setup and maintain a tax escrow account
Credit report fee – Cost to obtain a credit report
Flood cert fee – Cost to check if a property is in a flood zone
Attorney fee – Cost for the closing attorney to conduct the closing
Lenders title insurance – Required insurance cost paid by the buyer (cost is .25% x loan amount)
Recording fees – Fees to the State to legally record the title and note documents
City taxes – In most cases (in Massachusetts) the bank will collect 5 months of city taxes at closing. 3 months are used to pay your first quarterly tax bill that will inevitably be due in the coming months if not immediately and the remaining 2 months are deposited in your new tax escrow account for future payments.
Home insurance – 1 year of home insurance is due upfront paid in full and the bank then usually collects 2 extra months for your new insurance escrow account. A year from your closing the annual insurance policy is due to be paid again which the bank will handle for you.
Prepaid interest – You will pay the mortgage interest for your new loan at closing from the date of the closing through the end of that month. As an example, if you close on the 10th of the month you will pay 20 or 21 days interest at closing. If you close the last day of the month you will only pay 1 day. That is going to be less money due, but it’s only because you are simply paying for every day you live in the house and hence if you move in on the 10th of the month you are paying to live in the house for an extra 20 or 21 days.
Owners title insurance: This is an optional coverage you will be offered from the closing attorney prior to closing. It is a one time fee at closing and it offers you the same protection that the lender gets for having insurance on the title to your home. I also add this to the initial fee quote upfront to show a worst case scenario since most home buyers tend to purchase it.
Attorney representation fee: Some attorneys charge a personal representation fee for additional work or consulting during a buying process. This will be discussed with the closing attorney when choosing who to work with upfront.
Sample closing fees for a $400,000 home purchase with 20% down payment.
Home inspection: $500
Offer deposit: $1,000
Mortgage application deposit: $499
P&S deposit: $19,000 (5% of $400,000 minus the 1k offer deposit)
Total upfront: $20,999
Down payment: $80,000
Closing costs in total: $3,588
Prepaid taxes: $2,000
Prepaid Insurance: $1,680
Prepaid interest: $68.84
Owners title insurance: $975
Total at closing: $88,311.84
Total costs, ($88,311.84) minus (3) deposits provided upfront ($20,999) leaves Total net.
$88,311.84 - $1,000 - $499 - $19,000 = $67,812.84 total money due at closing table.
Chris Butts is a Loan Originator and Sales Manager at Leader Bank. He has been in the mortgage industry for over 15 years and is committed to providing his customers with the highest quality service. His extensive experience and knowledge allow him to effectively and consistently help his customers during the loan process, whether it’s a first time home buyer, a refinance or purchasing a dream home.Learn More About Chris
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