What Are Closing Costs On Mortgage Transactions


What Are Closing Costs On Mortgage Transactions

This BLOG On What Are Closing Costs On Mortgage Transactions Was UPDATED On May 27th, 2018

On every mortgage transaction, there are closing costs associated with the transaction.

  • Whether they are home purchase or refinance mortgage transactions there is always closing costs on mortgage transactions
  • Many first time home buyers do have a grasp on the down payment required
  • Many have a hard time understanding closing costs
  • Others have a hard time justifying paying closing costs

Basic What Are Closing Costs On Mortgage Transactions

Basically, closing costs on mortgage transactions are any costs that is associated with the origination and closing of a home loan.

  • On a purchase mortgage transaction, closing costs will include both fees and costs of the mortgage loan origination such as the following:
    • origination fees
    • credit report fees
    • pre-paids, points
    • as well as the cost of the real estate transaction such as attorney’s fees
    • appraisal fees
    • home inspection fees
    • other inspection fees
    • homeowners insurance
    • other fees and costs with the purchase and origination of the mortgage loan
  • Many home buyers do not have to worry about closing costs
  • This because closing costs can be covered by a home sellers concession or lender credit
  • Closing costs are not as bad as home buyers and/or homeowners refinancing their mortgage may think
  • It is very manageable and can be covered by mortgage lenders in lieu of a slightly higher mortgage rates

Basic Breakdown Of Closing Costs On Mortgage Transactions

Every real estate transaction can have different closing costs.

  • There is no set formula such as a set percentage
  • For example, if home buyers were to purchase a home for $100,000, then closing costs will not be a set 2% of the purchase price of the home
  • Closing costs varies depending where the property is located at
  • It depends on the state and the county the property is located
  • The two categories of closing costs are the following:
    • fees and costs of the mortgage lender
    • third party charges and fees

Examples Of What Are Closing Costs On Mortgage Transactions

Here are some basic costs associated with obtaining a mortgage loan.

  • Credit Reporting Fee:  
    • A credit reporting fee will be charged at closing
    • When a mortgage company pulls credit at the time of mortgage application, the lender will not charge borrower the credit reporting fee upfront
    • They will charge the credit reporting fee at closing
    • If borrowers do not proceed with the mortgage application and closing process then there is no charges
    • The mortgage company needs to absorb the credit reporting fee
  • Origination Fee: 
    • Mortgage brokers need to charge a loan origination fee for their services
    • Yield Spread Premium is what mortgage brokers make for their commission
    • It is often referred as YSP
    • The Yield Spread Premium is part of the Origination fee
  • Attorney Fee:  
    • Many states like Illinois, both buyers and sellers are represented by real estate attorneys
    • Attorneys fees are part of the closing costs
    • Average real estate attorneys charge around $500 for real estate purchase transactions
  • Home Inspection Fee:
    • A Home inspection is not required by lenders
    • It is highly recommended for home buyers in the event if there are hidden issues such as the following:
      • mold
      • foundation defects
      • or other issues that cannot be detected by the average person
  • Discount Points: 
    • Discount points are upfront fees paid by borrowers to get a lower rates
    • Discount points can be paid by a sellers concessions
  • Underwriting Fee: 
    • Many mortgage lenders charge underwriting fee
    • Average underwriting fee charged is close to $1,000
  • Recording fees: 
    • There will be recording fee charges by the county and/or city or both
  • Pest Control Fee: 
    • Pest control inspection fee is optional
    • It is up to the homeowner whether or not to hire a pest control inspector or termite inspector unless lender requires it
  • Appraisal Fee: 
    • Appraisal is required on all mortgage loan transaction
    • An appraisal needs to be paid by the home buyer
    • Appraisals for single family homes are normally under $500 dollars
  • Survey Fee:  
    • Survey fees are part of closing costs
    • Either the seller pays for it or the buyer pays for it
    • Or sometimes it may be split between the buyer and seller
  • Title Search Fee: 
    • Title search fee will required to do a thorough background check on the  title of the property
    • This is to make sure there are no liens on the property and the title to the property is not clouded
  • Title Insurance:
    • Title insurance is required to make sure the title is free and clear of any liens
    • There are title charges for both the buyer and seller which is part of closing costs

What Are Average Closing Costs?

As mentioned earlier, closing costs vary depending the state and county the property is located.  Average closing costs is between 2% to 3% of the home purchase price.  Sellers concessions is allowed where the home seller will pay the buyer’s closing costs.  FHA allows up to a 6% sellers concession towards a buyers closing costs. VA loans allow up to 4% sellers concessions towards buyers closing costs. Conventional loans allow up to 3% of a home buyers closing costs for primary residences and 2% sellers concessions for investment homes.

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