What Are Closing Costs And Who Pays Them?

What Are Closing Costs?

Update 2018 : The HUD-1 Settlement Statement has been replaced by the Closing Disclosure.

Closing Costs are fees that both buyer and seller pay in the sale of a property. They are typically associated with the buyer costs as the buyer initiates the loan process after the offer is accepted. In fact the seller often pays more than the buyer but it appears as a deduction. They are agreed upon costs that appear on the HUD-1 Settlement Statement. On page two of the Settlement Statement there are two columns that read, Paid From Borrower's Funds at Settlement and Paid From Seller's Funds at Settlement. These columns have line items for the typical costs associated with a home purchase. These line items are then totaled and moved to page one of the Settlement Statement where they are added to the buyers column as an expense the buyer pays and they are added to the seller's column as a deduction from the sellers proceeds. This is important because you'll note it says buyer expenses and seller deductions so the buyer has to bring money to the closing while the seller is having theirs deducted from their proceeds.

How Much Are Closing Costs?

Closing Costs are calculated on a number of factors and no two closings would have the same amounts as it depends on the sale price, the interest rate, the date of closing and many more factors. Typical HUD-1 statements  have the buyer paying more line items but the seller pays the bulk of the costs. The buyer in a home purchase may have some are all of the following ...

• Origination Fee
• Discount Points
• Title Insurance
• Pre-Paid Insurance
• Pre-Paid Interest
• Credit Reporting Fee
• Bank Processing Fee
• Appraisal Fee
• Flood Certification Fee
• Survey
• Recording Fees
• Attorney Fees

Closing Cost Calculator

There are other costs associated with a home purchase that a buyer will typically pay for and they are often listed as POC which stands for Paid Outside of Closing. These include a home inspection, termite inspection possible a septic inspection or any other service the buyer might decide to hire before purchasing the home. To determine the what you will need for a home you are thinking of buying you need to speak with a Mortgage Broker and they will provide you with a Good Faith Estimate of what you can expect to pay and whether you will need to ask the seller to help pay some of the costs. Using a closing cost calculator once they have an idea of the purchase price they will provide you with a list of their charges and the other fees you will need to pay. This number must be within a certain percentage of the actual number of the final HUD-1 Settlement Statement so you will know exactly how much you will need to close. The average home buyers will pay is between 2 and 5 percent of the purchase price.

Earnest Money Deposit

There are a number of times the buyer must write a check before getting to the settlement table and some are non refundable so it's important to know upfront what you will need to pay for. In a typical North Carolina Offer to Purchase there are two amounts of money the buyer will write checks for. The first is what is known as the Due Diligence Fee, this is an amount of money the buyer pays to the seller to allow them to get their loan processed and conduct any inspections. this amount is negotiable and non refundable, it is made out to the seller and they cash it. The second amount we typically see is the Earnest Money Deposit. This is paid to either the listing company or closing attorney's trust account and it remains there until the settlement date when it is applied to the purchase price of the home. In North Carolina if the buyer decides to terminate the contract before the due diligence period is up they are entitled to their Earnest Money Deposit back. Other checks a home buyer might write before getting to the settlement table include paying for a home inspection, a termite inspection, a survey, well/water test, septic inspection or any other contractors or inspectors that they may choose to hire. Some of these can be paid at settlement.

Seller Paid Closing Costs

The seller has the bulk of the expenses in a house settlement because they pay the real estate commission for both listing company and buyer company. They also often have a mortgage they need to pay off and they may be contributing to the buyers  costs. The seller will normally incur the following expenses...

• Real Estate Commissions
• Revenue Stamps
• Recording Charges
• Document Preparation
• Mortgage Payoff
• Property Taxes

Why Does The Seller Pay Some Of The Buyers Closing Costs?

In most cases the buyer needs assistance with some of their expenses and so it is common to ask the seller to chip in. In most real estate transactions  everything is negotiable and negotiating closing costs is part of the process. Some sellers balk at having to pay the costs for the buyer but if it means the difference between a sale and the buyers walking then they normally come around. If the seller has a figure they must get for the home and can't afford to pay for the buyer they may be able to raise the sales price as long as the home appraises. The logistics of who pays for what comes down to the fact that the buyer needs to have the cash to pay for the expenses whereas the seller if they have enough equity in the home will be be netting less money from the sale. If they were to keep the house on the market and end up reducing the price the result is the same plus the added expense of owning the home for that period of time.

Types Of Mortgages That Have Closing Costs?

All mortgages have some fees associated with them as this is how the mortgage brokers and banks get paid, the banks get paid during the life of the loan until it is paid off. This is why the interest rate you lock in at is so important because over the course of a thirty year mortgage the interest paid is quite substantial. Ask for an Amortization Schedule and you will see how the payments break down between Principal and Interest. Seeing how much the interest you pay and how much of your monthly mortgage payment goes towards paying it is an eyeopener. Paying discount points in the is a way to buy down the interest rate thus saving money over the life of the loan so if the seller agrees to pay some the buyers expenses this is very beneficial to the buyer.

Types Of Loans Available To Home Buyers

There are a number of different loans available to home buyers and a mortgage broker will determine which one is right for each buyer. In some cases a home buyer might be able to choose from more than one loan program but often there is one loan program that best suits each buyer. Loans that are featured in the NC Offer to Purchase include...

• Conventional
• FHA
• VA
• Other/USDA

Each loan program has a unique set of requirements related to down payment, credit score, location of the property and loan amount. Some of the loans are good for first time home buyers who often do not have the money saved for a down payment or a buyer who has a lower credit score. Regardless of what loan program you choose there will be closing costs however some will actually have the buyer bringing no money to the settlement table and sometimes they may even get money at closing. What is the right Mortgage for you is found by consulting with a Mortgage Loan Officer. They should be experienced in the types of loans available in your area, for example here in Wake and Johnston Counties in North Carolina USDA loans are very popular but they have loan amount restrictions and they can only be used if the property is in a designated USDA eligible area. Here is the complete USDA Rural Housing Loan NC Requirements from Eleanor Thorne who with her husband Steve Thorne  a North Carolina Mortgage Banker  can get you answers to your questions about closing costs and getting approved for a mortgage. If you need a house payment calculator or an interest calculator or you just would like to ask What is a Mortgage? then you will get the answers from them. Here is a blank HUD-1 if you would like to see your name in the buyer column give me a call today at 919-601-2268 or you can email me at [email protected] SaveSave