Did You Budget for Closing Costs?

Buying a house requires a significant financial investment — one in which many prospective buyers aren't fully aware of. The two elements that receive the most focus are the mortgage calculations and the down payment. Although it's wise to determine how much home you can afford before you begin your search, it's easy to forget about the other costs associated with the transaction. Budgeting for closing costs is a key aspect of your overall budget for buying a house.

What are Closing Costs?

"Closing costs" is a catchall term that refers to the various fees you'll pay as you finalize the home sale. Every real estate transaction is unique and one homebuyer may pay a different percentage than another. While these costs ultimately depend on the individual home sale, home buyers should expect to pay between two percent and five percent of the loan's principal. How is this amount calculated? Closing costs usually include:

• Application Fees: Also known as administrative or processing fees, the application fee is charged by the lender to process your loan application.
• Inspection Fees: This fee pays for a qualified home inspector to evaluate your home's condition. You may also have to pay a separate fee for a pest inspection.
• Appraisal Fees: The appraisal fee covers the cost for a professional appraiser to evaluate your home and provide an estimate of its market value.
• Property Taxes: Depending on your country, you may need to pay roughly six months' worth of property taxes at the time of closing.
• Title Search & Insurance: These costs are paid to the title company that searches public records concerning the property and are to ensure that there are no claims or liens against the property.
• Real Estate Broker Fees: These fees are paid to the buyer's and seller's agent for their work in the transaction.
• Transfer Taxes: Transfer taxes, which may also be referred to as conveyance, property transfer, or stamp taxes, are owed to the government where the property is located.
• Prepaid Interest Fees: These costs will cover the interest on the loan between the date of closing and the end of the month.
• Origination Fees: Similar to processing fees, origination fees are charged by the lender initiating the loan.
• Credit Report Fees: You may have to pay a lender to check your credit score and issue your credit report.
• Recording Fees: Recording fees cover the local government's recording of the mortgage and deed into the public record.
• Notary Fees: This small fee is paid to the licensed individual who notarizes your documents.
• Land Survey Fees: These fees are paid to a professional who surveys your land to determine property lines.
• HOA Fees: If your property is within a homeowner's association, you may need to pay certain fees at closing.
• Flood Determination Fees: Your property will be evaluated by a professional to determine if it's in a flood zone.
• Home Warranty Fees: This is an optional cost only if you choose to purchase a home warranty.

Who is Responsible for Closing Costs?

Many of these fees, such as appraisal, inspection, and application fees, are the responsibility of the buyer. Others, including title search & insurance, transfer taxes, and broker fees, are traditionally the responsibility of the seller. Thankfully, some of these costs can be negotiated between the seller and buyer. Certain fees may even be negotiated or reduced by speaking with the lender. The best way to prepare for these varying costs is to assume that your budget should include a two to five percent increase to cover these costs.

Although you may or may not be responsible for all these fees when buying a house, having the funds available is the most responsible way to proceed. When negotiating these fees, confide in your real estate agent and let them advise you on how to approach the negotiations as amicably and respectfully as possible.

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