The total sum of all the fees associated with buying a home is referred to as the “buyer’s closing costs.” These closing costs are usually more out-of-pocket money from the buyer in addition to their down payment. Generally speaking, closing costs can run from 2 to 7 percent of the purchase price. For the buyer this will largely depend on the fees the lender charges and the prorated payments made to escrow.
It is important to understand what closing costs you are paying for under the Purchase Agreement. Make sure you read the Purchase Agreement carefully and ask your Realtor for a copy of the Purchase Agreement before you write an offer, so that you have time to review the Purchase Agreement and clarify any questions you might have.
WHAT ARE THE TYPICAL BUYER CLOSING COSTS?
Some closing costs are automatically assigned to either the buyer or seller of the property, and other costs may be negotiated or dictated by standard custom in the area. Some typical buyer closing costs may include the following (Note: Under the Purchase Agreement it may be negotiable to determine who pays which portion of the closing costs).
- The Down Payment
- Buyer’s Escrow Fees
- Loan Fees
- Loan Processing Fee
- Application Fee
- Credit Report
- Underwriting Fee
- Buying Points
- Appraisal Fee
- Prepaid Interest on the Loan
- Private Mortgage Insurance (PMI)
- Any Impounds on the Loan
- Mortgage Broker’s Fee
- Homeowner’s Insurance
- Buyer’s Portion of Title Insurance
- Inspection Fee
- Home Warranty Plan
- Homeowner’s Association Transfer Fee
- Homeowner’s Association Dues (prorated)
- Property Taxes (prorated)
- Other fees as per the Purchase Agreement
- Miscellaneous fees (notary fees, recording fees, messenger fees, etc.)
It is very important that you make sure you fully realize what the fees are that are associated with your closings costs. The fees vary relating to several factors, including the purchase price, amount of the loan, the type of loan they applied for and the terms of the Purchase Agreement. Some of the closing costs, particularly those associated with the loan application, may be paid upfront.
SHOULD YOU NEGOTIATE FOR CLOSING COSTS?
In addition to sales price, some buyers and sellers may include closing costs in their negotiations. There are many reasons a buyer and seller may negotiate over these costs. If the buyer does not have the cash for the down payment and the closing costs, then the buyer may offer to pay a higher price for the property in return for the seller paying some or all of the allowable closing costs. A seller may offer to credit the buyer some closing costs if the seller is motivated and wants to sell quickly. On the other hand, a buyer may offer to pay more of the closing costs if they really want the house. It all depends on the situation of the buyer and seller. You may need to discuss with your lender if the seller can credit some of the closing costs because sometimes this is not allowed.
HOW DO PROPERTY TAX AND HOA PRORATIONS WORK?
At closing, specific closing costs are typically prorated (or distributed) between buyer and seller. The most frequent proration is for property taxes. This is because of the property tax due date. The seller is “charged” for that portion of the property taxes when they own the property, and the buyer’s responsibility for the property taxes would typically start as of the date the buyer owns the property.
THE PROPERTY TAX CALENDAR
In the State of California property taxes are as follows:
- Property Tax Year is July 1 to June 30 (1st half: July 1 – December 31) (2nd half: January 1 – June 30)
- First half of annual property taxes is due November 1st, delinquent if not paid by December 10th
- Second half of the annual property taxes is due February 1st, delinquent if not paid by April 10th at 5 pm
WHAT IS AN IMPOUND ACCOUNT?
In some parts of the country, these accounts are referred to as escrow accounts. The terms are used interchangeably. Impound Accounts are separate savings accounts set up by mortgage lenders to pay property taxes and property insurance on behalf of the home owner. The lender collects a monthly amount equal to about 1/12th of the total sum due.
EXAMPLE OF AN IMPOUND ACCOUNT PAYMENT
If the taxes are $1200 a year, the lender will collect $100 per month. If the insurance premium is $600 per year, the lender will collect an additional $50. This $150 impound account payment is then added to the regular principal and interest payment to equal a total payment. This total payment is referred to as PITI, meaning it is principal, interest, taxes and insurance.
