Buying and selling a home is a complex financial transaction. It requires multiple professionals who assess whether the buyer’s ability to pay the mortgage and the property being purchased, as well as process the transaction.
These activities have a cost, and many of those expenses are assessed to the buyer of a home. These are referred to as closing costs, because they are paid during the closing period, which is between when an offer is made and when the property is officially transferred between seller and buyer.
Typical closing expenses will cost home buyers between about 2 to 5 percent of the purchase price. So, if your home cost $400,000, you can expect closing fees between $8,000 and $20,000.
You can often have some or all of these costs rolled into the mortgage. If the seller of the home you’re buying is desperate to get rid of the home, you may also be able to negotiate having them pay all closing costs.
But be aware that even if you obtain a physician mortgage loan that enables to you borrow without a downpayment, you may need extra cash to get through the closing process.
Below is an overview of the closing costs typically incurred during the home buying process.
Lenders will charge several fees to cover the cost of processing the mortgage application. Depending on the lender, some of the costs will be listed as a single application fee, but in other cases they may be listed separately. They can include fees for application, origination, underwriting, transfer, closing, couriers, notaries and documentation.
The lender will conduct a credit check to ensure you are a qualified buyer and can make your mortgage payments. The fee for this is paid by the buyer.
Your lender will order an appraisal of the home to ensure that your are not borrowing more than the home is worth.
The home will need to be inspected by a certified home inspector and a pest specialist, the costs of which is typically paid by the buyer. Home inspectors will check to ensure the home’s electricity, plumbing, roofing, HVAC system and overall structure are up to building codes. Pest specialists will look for the presence of termites. Depending on the age and/or location of the home, there may be other tests and inspections, such as for radon, lead, or soil integrity.
You will need to pay a fee that enables to the lender to conduct a title search. A title company will verify that the seller actually owns the property being sold. A title opinion will also be conducted by an attorney, who reviews the home’s title for any burdens or claims that could impact the transfer of the home.
You may also have to pay a small amount for title insurance, which protects the buyer and the lender from any mistakes made by the title company during the title search.
The title company may also charge a recording fee to cover the cost of recording the transfer of the title at the county clerk’s office.
Prepaid homeowner’s insurance, property taxes, and interest
Mortgage companies will require your home be insured to protect their interest in the property. In most cases, they will add the cost of insurance to your mortgage payment and place that in escrow. Since it will take several months of payments to collect enough for insurance premiums, you will likely have to pay the first several months in advance.
Buyers will usually have to prepay property taxes for four to eight months at the time of closing. These funds are also placed in escrow and paid by the lender when due. Future property tax requirements are added to your mortgage payment and also placed in escrow.
Most lenders require some prepayment of interest that will accrue between closing and the date of your first mortgage payment.
Lenders often require a survey, which makes certain that the property’s legal description matches what is on the property and that buildings on the property meet legal codes.
In some instances, you may be able to prepay mortgage interest at closing to pay down your overall interest rate. One point equals 1 percent of the loan, so on a $300,000 home loan, one discount point would cost $3000. Sometimes, the points can be added to the loan amount.
Keep in mind that closing costs will vary by lender, so you can shop around for comparisons. Federal law requires a “good-faith” estimate of the costs within three days of the mortgage application.
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Colin is the Founder & CEO of LeverageRx, an online lending and insurance marketplace for doctors. Colin has over 10 years of experience in financial services and is a licensed life and health insurance agent.