Getting ready to purchase a home is a huge financial undertaking. While you are probably aware of having to save up for a down payment, you might not know about closing cost fees. Don’t be taken by surprise at the closing table; here’s what you need to know about closing costs.
What are closing costs?
Closing costs are the fees charged for services performed during the home purchasing process that you will pay at closing. Closing is the final step of the loan process and is a meeting between you (the buyer), the seller, and closing officer (a lawyer or title/escrow company representative, depending on the state). You will review the legal documents provided in your loan package and execute all required documents. This step is extremely important, as it is the final confirmation of the loan terms as discussed with your lender.
What fees are included in closing costs?
The closing costs you might have to pay will vary based on the property, where you live, and the loan you choose. The following are a few of the most common fees you may see.
Application fee: charged by your lender to process your loan application
Home Appraisal: paid to the appraisal company for confirming the value of the home
Credit Report: your credit history and score will be pulled to determine your eligibility for a loan and interest rates.
Title Survey: paid to the title company for doing a very thorough research of the property’s records.
Again, closing costs will not be the same for everyone as they vary by region. On average, most homebuyers typically pay about 2 to 5 percent of the home purchase price. For example, if the home costs $250,000, you might pay between $5,000 and $12,500 in closing fees.
Can I avoid closing costs?
It is likely you might be able to avoid some closing cost, but not all. Here a few ways to save on closing costs.
Look/Ask for discounts: Your lender might offer a discount or even waive your application fee.
No-closing-cost mortgage: This option eliminates closing costs, but not completely. You will be charged a higher interest rate, or the fees will be rolled into the total cost of the mortgage. This is a good option for those who might not have the cash at the time of home purchase but be aware that it will end up costing more in the long run.
Shop Around: Your lender will probably have preferred vendors, such as title companies, home inspection, etc. It is not required that you use these vendors, so do some research and shop around to find one who meets your needs.
Negotiate: Both you and the seller are responsible for paying certain fees. For example, the seller typically will pay the title transfer and realtor commission. You can try negotiating with the seller to have them assume some of your fees.
Your lender will provide you with an estimate of what closing costs will be at the beginning of your application process, which will allow you the chance to shop around to find the best lender and deal for you. After finding a lender and going through the loan process, you will receive a closing disclosure, or the final closing cost total, at least 3 business days prior to closing. This is your time to make sure everything looks right and if you have questions or find a mistake, you have time to contact your lender. If you’re worried about how much you’ll pay in closing costs, there’s plenty of options for you! NFM participates in most state bond programs that provide closing cost assistance.
We recently discussed the fourth step in the home buying process: applying for the loan. Once you apply for a home loan, your Mortgage Loan Originator will submit all of your documentation to Processing, and from there, your loan will be sent to Underwriting. These are crucial steps, and it is important to understand some of the factors that go into getting your home loan approved.
Processing Once you have submitted all of the required documentation for your loan application, your Loan Originator will submit everything to Processing. The Processor puts all of the documentation together for Underwriting, and works closely with the Loan Originator to ensure a smooth process. They will order a title search to make sure that the seller has legal rights to the property, and schedule an appraisal to determine the value of the property. Based on information received, the Processor may reach out to the borrower for any additional documentation needed. Once all of this has been completed, the Processor will send the application to Underwriting.
Underwriting In the underwriting process, the lender determines the degree of risk involved with lending the consumer money. Here are the “Four C’s” that the Underwriter will evaluate:
Credit: Your credit score gives the lender an idea of how well you manage debt. The Underwriter will pull a credit report based on information from the three major credit bureaus: Equifax, Transunion, and Experian. They will analyze your credit history, including your credit score, payment history, number of open accounts, and the balances on those accounts
Capacity: Capacity is a consumer’s ability to make payments on the loan. The Underwriter will evaluate your debt-to-income ratio, which is your monthly debt divided by your gross monthly income. The lower your debt-to-income ratio, the more likely it is that you will be able to make mortgage payments.
Collateral: Collateral is an item of value that is pledged for repayment of a loan; in this case, the house you are buying. The Underwriter will compare the value of the house based on the appraisal, and comparable properties in the area, to the cost at which the house is being purchased.
Capital: Capital refers to your income and any verifiable monetary assets you may have, such as retirement funds, checking and savings accounts, etc.
Once the Underwriter has approved all applicable documentation, and determines that the loan is a good fit, a clear-to-close (CTC) will be issued, allowing the loan to move into the final stage of the process: closing on your new home.