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  • What exactly are closing costs?

    Wednesday, March 27, 2024   /   by Amy Brown

    What exactly are closing costs?

    Before making the decision to buy a home, it’s important to plan for all the costs you’ll be responsible for. While you’re busy saving for the down payment, don’t forget you’ll want to prep for closing costs too.

    Here’s some helpful information on what those costs are and how much you should budget for them.

    What Are Closing Costs?

    A recent article from Bankrate explains:

    Closing costs are the fees and expenses you must pay before becoming the legal owner of a house, condo or townhome . . . Closing costs vary depending on the purchase price of the home and how it’s being financed . . .”

    Simply put, your closing costs are the additional fees and payments you have to make at closing. According to Freddie Mac, while they can vary by location and situation, closing costs typically include:

    • Government recording costs
    • Appraisal fees
    • Credit report fees
    • Lender origination fees
    • Title services
    • Tax service fees
    • Survey fees
    • Attorney fees
    • Underwriting Fees

    How Much Are Closing Costs?

    According to the same Freddie Mac article mentioned above, they’re typically between 2% and 5% of the total purchase price of your home. With that in mind, here’s how you can get an idea of what you’ll need to budget.

    Let’s say you find a home you want to purchase at today’s national median price of $384,500. Based on the 2-5% Freddie Mac estimate, your closing fees could be between roughly $7,690 and $19,225.

    But keep in mind, if you’re in the market for a home above or below this price range, your closing costs will be higher or lower.

    Sellers can help!

    You can negotiate with a seller to help cover closing costs as part of their 
    seller concessions. This can be extremely helpful in making your home purchase more affordable.

    Sellers have limits on the amount they can offer toward closing costs. The seller’s contribution can only reach a certain percentage of your mortgage value, which varies by loan type, occupancy and down payment. We’ve broken this down in the sections below.

    Conventional Loans

    Below is a breakdown of seller concessions limits for conventional loans. The percentage shown is based on the purchase price or appraised value, whichever is lower.
    For primary residences:

    • Down payments of 25% or more: 9%
    • Down payments of 10% – 24.99%: 6%
    • Down payments less than 10%: 3%

    For second homes:

    • Down payments of 25% or more: 9%
    • Down payments of 10% – 24.99%: 6%

    For an investment property, the maximum amount of seller concessions for any down payment is 2%.

    FHA Loans

    FHA loans are much more straightforward, and the contribution limit is 6% based on the lesser of the appraised value and the purchase price.

    VA Loans

    VA loan seller concessions follow a couple of different rules depending on what they’re being applied to. The full amount of seller concessions can be applied to discount points, origination costs, surveys, appraisals and credit report fees up to a limit of 4%.
    The remaining concessions can be applied to prepaid escrows like taxes and insurance or the VA funding fee.

    Jumbo Loans

    Seller concessions for jumbo loans may vary by lender.

    Make Sure You’re Prepared To Close

    Freddie Mac provides great advice for homebuyers, saying:

    “As you start your homebuying journey, take the time to get a sense of all costs involved – from your down payment to closing costs.”

    The best way to do that is by partnering with a trusted real estate professional. That gives you an expert to help you understand how much you’ll need to save and what you’ll want to be prepped for. It also means you have go-to resources for any questions that pop up along the way.

    Bottom Line

    Planning for the fees and payments you'll need to cover when you're closing on your home is important. Partnering with us can give you the guidance and confidence you need throughout the proces