What Cost Are Involved in Buying a House?

Closing Costs Involved When Buying a Home

Closing costs are the expenses associated with buying or selling a home. There are a lot of costs associated with buying a home that go beyond the down payment. Buyers (and sellers) must have funds set aside for closing costs, which are the funds paid at settlement to the service providers who assisted with the transaction. These costs can include title policies, recording fees, inspections, courier charges, reserves to set up escrow or impound accounts, and various fees that lenders typically charge.

I encourage all my clients to prepare for the funds needed to purchase a home in Southern California. If you do not consider all the costs, your monthly expense budget can be flipped on its head.  The costs associated with purchasing a home fall into two basic categories, upfront and ongoing. Typical closing costs for the California Area are explained below.

Upfront Costs

  • Down payment
  • Closing costs
  • Reserves

Ongoing Costs

  • Mortgage payments
  • Property taxes
  • HOA fees
  • Homeowners Insurance
  • Mortgage insurance (If any)
  • Home maintenance, repairs and utilities

This list below should help you through the process.

The Upfront Closing Cost

Down Payment

The down payment isn’t necessarily a surprise cost, but how much you put down can actually impact what you end up paying overall. Your down payment is the portion of the sale price that you’ll be expected to pay upfront when buying a home. The remainder of the sale price will be financed by your mortgage lender. This is usually the largest cost. In the past you could buy with no down payment, but in today’s current market when lenders have tightened their strings a bit, you should expect as little as 3% of the mortgage if you qualify for an FHA mortgage, or more depending on your credit score. With conventional loan, you may pay 5% to 20% down.

Ongoing Closing Cost

Mortgage Origination Fees:

The second largest cost is the loan origination fees, which is usually 1% – 5 % of the loan amount. This depends on your credit rating. With good credit, usually your fee is usually 1%-2%, but every local area may be different.

Discount Points:

Discount points are a type of prepaid interest or fee that mortgage borrowers can purchase to lower the amount of interest on their subsequent monthly payments—spending more up front to pay less later, in effect. Discount points are tax deductible. This is optional and used to buy down the interest rate.

Appraisal Fee:

Often paid before the closing to the appraiser who determines is the home worth the amount of the mortgage. This fee will be decided by the value and size of the house.

Credit Report:

Usually paid with application for the mortgage.

Mortgage Insurance (MI):

If you put down less than 20% in a down payment, lenders will charge you mortgage insurance as a way to minimize their risk of not getting paid back. Though it might sound strange, mortgage insurance isn’t meant to protect you. It’s actually meant to protect the lender from taking a loss in the event that you default on the loan. If the down payment is lower than 20% of the home’s, then the lender requires the buyer to pay for this insurance which helps to cover the lender’s loss if buyer fails to pay the mortgage. This is both a one-time fee paid at closing, and a monthly fee, which is included in loan payments until the home has 20% equity.

There are two types of PMI:

  • Private mortgage insurance (PMI): This type is used with conventional loans and can usually be canceled after you reach 80% loan-to-value, or the equivalent of having made a 20% down payment. Look for most recent policy about PMI.
  • Mortgage Insurance Premium (MIP): This type of mortgage insurance is found on FHA loans. If your loan-to-value ratio is less than or equal to 90%, you’ll be required to pay MIP for 11 years. However, if your ratio is greater than 90%, you’ll pay MIP for the entire life of the loan.

Escrow Account:

The lender sets up an account at closing with several months of taxes and homeowner’s insurance.

Hazard Insurance:

This covers damage within the first few years and is paid before the closing.

Recording Fees:

This fee is charged to record the deed, any affidavits, and the mortgage with the county.

Title Insurance:

It is required by the lender to cover mistakes or omissions made with the title when the home was cleared.

Buyer’s Inspection:

This is paid at the time it is completed which is usually 5 days of acceptance of the purchase agreement. Any additional inspections are paid by the buyer.

Property Taxes:

This is the buyer’s portion that the purchase agreement is written to include.

Reserve For Mortgage Payment:

Many first-time homebuyers are not familiar with reserves. While reserves aren’t necessarily a cost of buying a home, they do represent money that you need to have in the bank after you pay your down payment and closing costs. Mortgage lenders don’t want you to deplete your savings after buying a house. Rather, they want to ensure that you still have some money left over, so that you have the ability to make your mortgage payments, even if something happens to your income. Typically, when you’re buying a primary residence, they’ll ask to see that you still have at least two months of reserves — or two months worth of mortgage payments left. Depending on your loan program, however, you might need to have even more months set aside.

Utilities: 

This is any deposits and set up fees needed.

Homeowners Association (HOA) Fees:

If you choose to buy a house or a condo with a homeowner association (HOA), you’ll owe monthly HOA Fees. An HOA is responsible for making and enforcing the rules of a subdivision or housing complex and maintaining the common areas, like pools and playgrounds. HOA fees can cost anywhere from $50 per month to well over $500 per month; the more lavish your community, the more you’ll likely have to pay.

Home Maintenance:

The last cost you’ll need to consider is home maintenance. The amount of work your home needs and the type of work required will depend on your individual property. But as a rule of thumb, it’s recommended you set aside 1% of your home’s value per year to cover home maintenance costs.

How to Reduce or Avoid Closing Costs?

A lot of people want to try to reduce or avoid closing costs. While it’s impossible to eliminate closing costs entirely, there are some things you can do to reduce your expenses, including:

  • Paying cash for the home.
  • Going without a Realtor.
  • Using seller financing.
  • Avoiding discount points.
  • Avoiding mortgage insurance.
  • Sellers credit – Requesting the seller to pay for the closing cost.
  • First-time homebuyers can sometimes catch a break and have their closing costs paid for by a government agency. 

Who Pays The Closing Cost on a House? 

Both buyers and sellers pay the closing costs on a house. The buyer handles the costs involved with financing the home. The seller typically pays the commission for both the buyer’s agent and the seller’s agent. Sellers may also agree to seller concessions, which help cover the closing costs for the buyer. 

How to Estimate Closing Costs?

Once you submit a mortgage application, your lender is required by law to give you a Loan Estimate (LE) within a few days. If you have questions or something doesn’t add up in your LE, ask your lender or attorney right away. You want to avoid surprises.

Prior to closing your loan, you’ll receive your final Closing Disclosure listing your closing costs. Be sure to compare your Closing Disclosure to the LE you received when you applied for your loan. Generally, you’ll be asked to pay via cashier’s check.  Contact Faruk to get a FREE estimate of your closing costs.

Closing Costs – Bottom Line

Additionally, certain closing costs can sometimes be added to a buyer’s loan amount, rather than paying it in cash at closing. What costs can be rolled into your loan vary by lender, but may include origination fees, appraisal and inspection fees or title fees. While this can lead to some initial cost savings, it will actually increase the total mortgage cost, as you’ll pay interest on these expenses over the life of the loan.

Cost and fees can vary depending where you live and the size house you are purchasing. When submitting a mortgage application, a good faith estimate of costs is given to the applicant based on the amount that the buyers is qualified to receive. It is usually about 3.5-4% of the mortgage for the closing costs except the down payment.

Contact Us

Your real estate agent can assist when writing an offer to purchase including a request for seller to pay closing cost or even to split them. Contact Us today to get an estimate of your closing cost. It’s always FREE.