What are closing costs when buying a home?

Closing costs are any fees related to the purchase of a home that are outside the price of the home.  Different states, counties, and cities calculate closing cost differently so it is best to speak with a real estate professional who is familiar with the area you intend to purchase your home.  Closing cost are the combined fees charged by different entities to close the deal.  Costs can include title fees, escrow fees, prorated fees such as taxes, insurance, and interest.  Closing fees can also include the down payment, points on the loan, lender fees, and any inspections or repairs negotiated within the purchase offer.  There is a ball park average for closing fees at about 1-2% of sales price.

How much are Santa Clara County transfer fees? There are fees related to the transfer the property and in Santa Clara County these are paid by the seller.  However San Jose, Mountain View, and Palo Alto also have a city transfer tax and this is typically split 50/50 by buyer and seller.  Other counties such as Santa Cruz, Contra Costa and Napa do not have city transfer fees.  Normally the transfer tax is calculated by multiplying the rate by sales price per $1000.

An example of  Transfer Tax:

A home with a $500,000 sales price in San Jose would have the seller paying $1.10 per $1000 or $550 for the county transfer tax.

The city transfer tax for this example would be split 50/50 by the buyer and seller and would be at a rate of $3.30 per $1,000 which would equal $825 each.

There are also document recording fees, courier fees, electronic copy fees and miscellaneous fees such as notary and FedEx normally adding up to less than $500.

Lender fees include the cost of completing the loan and can include points, processing, and document prep fees.  Extra fees paid can also include appraisal(s), credit reports, and certifications.   A point charged is normally considered an origination fee and represents 1% of the loan amount.  Buyers can pay points to help lower their annual percentage rate (APR).  Each lender and each type of loan can vary in cost and it is best to shop fees for different lenders.  However, the percentage rate of a loan varies mostly by point of time related to the “lock” and not the lender.  Why?  There are major players in the lending industry that set percentage rates for borrowing money.  These rates dictated by a point in time and for the most part, if there is a loan product out there offering 4.0% interest rate on any given hour of the day, almost any loan officer can obtain it.  So when trying to shop your loan product, shop the fees around that loan rate and the lenders services.  Do you want to compare loan products and fees? Here is a downloadable PDF to help you compare side by side loan products and related fees.

What is Mortgage Insurance? This is an insurance policy purchased by the lender on behalf of the borrower to protect the lender against a borrowers default.  This insurance typically has an upfront fee (which can be financed into the loan) and a monthly fee (charged as a part of the monthly house payment).  Mortgage insurance is in play for any home where the borrower is placing less than 20% down or utilizing an FHA loan.  Lenders consider any borrower placing less than 20% down a risk for default in a dynamic free market and therefore insure against default.  There are some lenders who will loan at 10% without a monthly MI but they charge an upfront MI.  Having to carry  mortgage insurance  is a common criticism of FHA loans.  All FHA loans, irregardless of the amount financed will require mortgage insurance; either upfront or monthly.  However, it makes logical sense if a borrower is only able to place 3.5% down it may very well be the only way to buy a home.  If you want to find out more about mortgage insurance check out local mortgage professional, Shashank Shekhar, blog posts on MI FAQs and FHA mortgage insurance qualifications.

Escrow fees charged by a neutral 3rd party to manage the transfer of title and money involved within the transaction.  In Santa Clara County , the seller pays for escrow fees and therefore reserves the right to choose with escrow company is used.  In contrast, Alameda County the buyer chooses and pays for escrow fees.  Most of the companies are only dollars off of each other on what they charge for services but buyer or seller can shop around if they want.   Escrow fees in general range from $800 – $1500 dollars per transaction.  It can vary depending on the sales price and type of sale involved.

Title fees charged to the buyer and seller to secure the title is free and clear of liens and is transferred with no other claims to the property.  This is an insurance policy to protect the seller in the transfer of title from seller to buyer.  A second policy is purchased by the buyer for the lender (unless the deal is all cash) to protect the lender’s collateral; the property.  Title insurance for the seller is paid by the seller and title insurance for the buyer or buyer’s lender is paid for by the buyer.  Policies are priced based on sales amount and loan amount.

HOA Fees can be charged when buying a condo, town home, or PUD (Planned Urban Development) home.  The Home Owner Association can charge for transfer fees, document preparation fees, and certifications.  A recent bill signed by Governor Jerry Brown limited the amount Home Owner Associations and related 3rd party vendors can charge buyers and sellers during the transfer of ownership.

Additional fees can come in form of repairs or inspections billed to escrow.  Some companies who complete inspections are willing to bill to escrow so that the seller pays out of proceeds or the buyer pays at closing.   For the most part the inspection companies will charge more to bill escrow and most real estate agents and loan officers prefer these fees stay out of the escrow to keep the purchase as clean as possible.  This is the same for repairs.  If the seller replaces the roof and doesn’t want to fork out cash until the deal closes, some companies will charge escrow and the seller can then pay out of the proceeds received from the sale at the time of closing.

It is important to understand your cost no matter which side of the deal you are on.  Commissions to the real estate agents are typically paid by the seller or in the case of a short sale the short sale lender(s).  Loan fees are based on your lender, if you don’t have one, find one and they can provide a good estimate on fees related to the loan you qualify for as a borrower. As a seller or buyer you can ask your real estate agent to prepare an estimated cost sheet.  Keep in mind, this is estimated.  Prorated items such as insurance, property taxes, and interest on the loan are determined by the closing date.  The buyer will initially pay a prorated property tax based on the seller’s rate and then receive a supplemental tax bill after the deal closes at the new rate.  For Santa Clara County we use 1.25% of sales price as an estimate for new property tax rates.

Buying a home can be a bit overwhelming to some and it is always best to consult with a professional in the local area to understand all your considerations.  If you have questions about closing costs or other real estate matters, contact me for a no-hassle, no-obligation consultation.

 

 

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  1. Great article. Important information that home buyers need to know. Thanks!

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