Help! I Was Told I Had to Pay Closing Costs on My Home! What Are They?

Many times, especially with First Time Home Buyers, I am asked what are closing costs?  When you apply for a mortgage, you will need to pay closing costs, which are fees, related to the purchase of your home, that are charged by the lender and third parties, such as your closing attorney (South Carolina is an attorney state - we do not use title companies to close on a home like many other states do)  So, in addition to owing the lender the down payment on the home and the principal and interest related to the mortgage, you will also owe closing costs, which are paid on closing day.

Back when the market crashed, seller offered closing cost incentives were widely used to help motivate buyers to purchase a home.  Now that we are presently in a seller's market, we do not see the seller paying the closing costs as much as we did in previous years but those costs are still definitely open for negotiating.

What is Included in Closing Costs?

Closing costs vary, depending on the sales price of the home as well as the lender you use for your mortgage.  Most commonly known costs associated in the closing of a home are as follows:

• Loan origination fees (this includes loan processing fees, underwriting fees, credit reports, discount points, etc) - $700 to $1300 on average, depending on lender
• Appraisal - $375 to $475 depending on lender
• Pre-paid interest - $25-$1000, depending on loan amount, interest rate and when scheduled closing date is to occur
• Title Search - $175, depending on attorney
• Title Binder - $150 depending on attorney
• Attorney Fee - $350 on average
• County Recording Fee - $60 on average
• Courier - $60 on average
• Owners Title Insurance - depends on loan amount; plan on $75 to $100 per $100,000
• Lender's Title Insurance (protects the lender just in case the title is not clean) - depends on loan amount; plan on $330 to $350 per $100,000
• Home Warranty, if chosen and not paid by seller - depends on type of policy but $600 average
• Homeowners Insurance - 1 year pre-paid upfront - depends on selected coverage.  Also, 3 months are put into escrow since your lender will be paying your homeowner's insurance premium, not you.
• Taxes - 3 months of escrow - cost varies

How Much Will You Pay?

Typically, homeowners will pay between 2% to 5% of the purchase price.  So, purchasing a $100,000, you will be expected to pay between $2000 and $5000 in closing costs.  

If the seller has agreed to pay closing costs, please note in SC real estate law, the seller agrees to pay UP TO whatever the agreed upon amount is.  So, for example, if the seller agrees to pay up to $5000 in closing costs and the actual closing costs are $4600, you do not pocket that extra $400 as the seller is required to only pay the actual amount of $4600.

Also note, when negotiating closing costs on a home, it is always wise that you ask your lender ahead of time what they will allow for "seller pre-paids and non-allowables".  This is seller paid closing costs.  Most banks have a cap as to what they will allow a seller to contribute for closing costs.  Unless going with a VA loan, the standard cap is 3.5%.

When first applying for a loan, your lender will give you a Good Faith Estimate (GFE) of what your closing costs will be within 3 days of applying for your loan - this is mandatory by law.  Within a day of closing, your lender will send you a closing HUD-1 settlement statement which will have your closing costs spelled out for you.  Always review that statement with your lender and Realtor.  Compare that to your GFE to make sure there are no unexpected surprises.

Hopefully this information helps your home buying process go much smoother!