What kinds of buyer closing costs can I expect to pay? How much money will I need, besides the down payment? How do they calculate lender, title, and escrow fees for home buyers?
Buyer closing costs depend on lots of things, including the type of loan, the type of property, the final sales price, and even your credit rating.
You can print this Cost to Buy a House Worksheet to estimate your buyer closing costs. This worksheet includes the upfront costs, which are paid at the beginning of escrow, and the closing costs, paid at close of escrow.
If you want to estimate your monthly housing costs, you can also read about The Cost to Own a House.
Buyer Closing Costs – Beginning of Escrow
Earnest Money Deposit
As soon as the seller accepts your offer to buy a home, you will need to submit an Earnest Money Deposit (EMD) to the escrow officer. This shows that you are a serious buyer: you have money, and you are committed to buying this house. You specify the EMD amount in your original offer to the seller. These funds are held by the escrow company, and will be used toward your down payment and buyer closing costs. The EMD may be refundable if you change your mind about buying the property. Please check with me regarding the refundability of your EMD.
Home Inspection
As soon as you open escrow, you can hire a home inspector to check for any issues. The home inspection fee depends on the size and type of property, and the inspector you choose. Most home inspections cost between $250-$750. Your home inspector may recommend further inspections, such as for the roof or sewer system. Read more about Home Inspections.
Appraisal
If you are taking out a mortgage to buy your home, the lender orders an appraisal. The appraisal ensures the property is worth at least the purchase price. Your lender usually asks you for a credit card to pay for it. Effective December 1, 2016, the appraisal fee for California VA borrowers is $600. For all other borrowers, appraisals usually cost between $400-$600. Read more about Home Appraisals.
Buyer Closing Costs – Close of Escrow
All other buyer closing costs are paid upon close of escrow. About a week prior to close of escrow, you will submit a wire or cashier’s check to the escrow company.
It’s impossible to know exactly how much you will need to pay ahead of time. The final buyer closing costs aren’t calculated until after the title is transferred to your name. When the escrow company asks you for the wire or check, they add a pad of about $500, to ensure they have enough to cover all expenses. As soon as the final costs are calculated, the escrow officer sends you a check for any overpayment.
If you are an all-cash buyer, read about Closing Costs for Cash Buyers.
Here is a list of common fees, to give you a general idea of buyer closing costs in San Diego County. I have also included an example for someone buying a $500,000 house with a $400,000 mortgage.
Closing costs are either non-recurring (one-time), or recurring (pro-rated,on-going).
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Non-Recurring Buyer Closing Costs
Lender Fees
Here’s a list of some of the lender fees for a conventional mortgage, provided by mortgage banker Nick Richardson from JMJ Financial. Keep in mind that some loan programs charge only some of these, and others charge only one flat fee.
- Loan Processing Fee
- Loan Underwriting Fee
- Tax Service – the County will contact the lender if a buyer doesn’t pay property tax, so the lender can pay it and not risk losing the house to a tax lein
- Origination – this can be a flat fee or percentage of loan. If a lender is charging 1.00 point for origination, this is 1% of your loan balance. 1.00 point of a $400,000 loan equals $4,000 in fees.
- Discount Points – You might have the option to pay discount points, in exchange for a decrease in your interest rate. Each discount point is 1% of the loan balance. A lender charging 2.00 discount points on a $400,000 loan is charging $8,000 in fees.
- Mortgage Insurance – Required if the Loan-to-Value ratio is higher than 80%. Your lender might give you the option to pay your mortgage insurance in one lump sum at the beginning, instead of paying monthly.
- Credit Report Fee
- Flood Certification Fee – to determine if the property is in a flood zone.
- Appraisal – typically a flat fee charged by an appraisal company. (Usually paid at the beginning of escrow.)
Escrow Fees
The escrow company handles all the funds in a real estate transaction. The escrow fee is based on the purchase price, which is approximately $2 per $1,000 purchase price, plus a $200 base fee. Additional fees may include courier, document preparation, loan tie-in, HOA transfer, and other services provided over the course of the escrow.
Title Fees
The title company provides title insurance to both the buyer and the lender. The seller usually pays for the buyer’s owner’s policy, while the buyer pays for the lender’s title policy. Title insurance protects a policyholder against challenges to rightful ownership of real property, which arise from circumstances of past ownerships. The lender’s title policy premium is a one-time fee, based on the mortgage amount. Other title charges include subescrow, endorsement, notary, and County recording fees.
Recurring Closing Costs
The cost to buy a house includes recurring charges. Recurring costs will continue after escrow closes. Closing costs usually include mortgage interest for the current month, HOA fees for the next two months, any property taxes the seller has already paid, and the annual homeowner’s insurance premium.
Impound Account
Many borrowers have impound accounts connected to their mortgage. Some loan programs require them. The monthly mortgage payment includes a contribution to the impound account. The lender uses this impound account to pay for homeowner’s insurance and property taxes on your behalf.
Your first impound account deposit is often the second highest cost to buy a house, after your down payment. The impound account payment out of escrow may include three months of homeowner’s insurance and at least six months of property taxes. This money accumulates to pay for these large bills when they come due. Read my article about Property Tax Calculation for a more detailed explanation about a how property taxes are billed when you buy real estate. You can also download my Property Tax Calculation Worksheet to help you calculate your current tax liability, and predict your liability for future years.
Buyer Closing Costs – Example
Here is an example of buyer closing costs for a $500,000 purchase with a $400,000 loan. This does not include any HOA, Mello-Roos, or Mortgage Insurance fees.
- Lender processing, underwriting, and appraisal: $2000
- Escrow fees: $1500
- Title fees: $1000
- Prepaid interest, 12 days: $600
- Homeowner’s insurance premium, first year: $650
- Impound Account – Homeowner’s Insurance: 2 Months $100
- Impound Account – Property taxes: 6 Months $3150
Total Closing Costs: $9000 (not including down payment, mortgage insurance, HOA or Mello-Roos fees)
The Bottom Line
When you plan to buy a home, be sure to budget for closing costs. Buyer closing costs include one-time fees for lender, escrow, and title. Planning for these expenses ahead of time will make the process easier.
Your lender can also help you estimate your buyer closing costs. Read my articles about:
- Choosing a lender,
- How to estimate how much you can afford, and
- How to get pre-approved for a mortgage.
If you are an all-cash buyer, read about Closing Costs for Cash Buyers.
In 2015, the Consumer Financial Protection Bureau released a toolkit to guide consumers through the process of shopping for a mortgage and buying a home. The Home Loan Toolkit is a helpful tool to help you plan your purchase.
UPDATE: Effective 2020, there is a new, no-cost online home buyer workshop. This new tutorial is a comprehensive homeownership education course. CreditSmart® Homebuyer U offers six modules to promote education, homebuyer preparedness, and financial management.
Your lender can give you a closing costs estimate, based on the loan program you choose. Feel free to send me any questions. Good luck!
I couldn’t have written this article without the expert advice of Nick Richardson:
Nick Richardson is a mortgage banker with EZ Fundings in San Diego, California, NMLS #966361. He can help you finance or refinance properties located in California. Nick can answer all of your questions about mortgage programs, with no hassle, no obligation. Contact him at 760-402-6962 or e-mail nick@ezfundings.com.
