By Doug Goelz, Mortgage Services
When you buy, you need to know how much cash you are going to need to close. In addition to the down payment, buyers have to keep in mind the closing costs that will be incurred with financing. On top of the typical 20% down payment, borrower’s need to plan for roughly another $10,000 (although this figure can vary widely depending on the property and the price) needed to close. Not all “closing costs” are paid at closing, and not all of the “costs” are fees. Nevertheless, it is cash the buyer needs before closing the deal.
First, even before the close of escrow, the buyer may have to pay for inspections, such as a home inspection (roughly $550-$600 each). The borrower also typically has to pay for the appraisal the lender requires (about $500). If the property is a large condo, the homeowner’s association (HOA) may charge for certain documents about the project required by the lender. These condo documents can cost as much as $200 or more, depending on the HOA.
At closing, the title company charges for their escrow services. Escrow fees are a function of the price of the property, but are typically $1000 – $1500.
The notary charges for notarizing many of the loan documents. If the buyer’s sign in the title company office, notary fees are nominal ($20 – $40), but if documents have to be signed outside of business hours or outside of the state (I have had many buyers have to sign the loan documents while they were away on vacation), the travelling notary fees (plus any required overnight shipping charges) can be $125 – $200.
The title company also charges for title insurance. Title insurance protects the lender and the owner against claims on the property that are not discovered when the property is purchased. If the property is financed, lenders require their own title insurance policy. It is the convention (and a good idea) for buyers also to obtain owner’s title insurance. The total cost of title insurance depends on the price of the property, the size of the loan, and if lender’s and owner’s property insurance are both purchased. Typically, title insurance costs $2000 – $4000. By the way, owner’s title insurance is paid for just once as long as the buyers keep the house; lender’s title insurance is paid for each time there is a new loan (e.g., if the owners refinance).
The lender typically charges about $1000 to make the loan. This includes underwriting, the credit report, checking to see if the property is in a flood zone, and a service to make sure the property taxes are paid when due.
In addition to the fees, buyers have to pre-pay a number of items when they purchase. These pre-paid expenses would have to be paid eventually in any case, but they add to the total amount of cash needed at closing. Often, the prepaid items are greater than the actual fees charged at closing.
With a new loan, the bank collects interest for the remaining days of the month in which the loan closes. For example, if the deal closes on the 20th of the month, the lender collects interest on the loan from the 19th through the end of the month as part of the closing costs. Depending when during the month the deal closes, pre-paid interest could be a few hundred dollars or several thousand dollars.
The lender requires that the first year of homeowner’s insurance be paid by closing. The annual premium for homeowner’s insurance could be less than $1000 (say, for a condo), or could be several thousand dollars for a large house.
Finally, all property taxes have to be paid if they are due. If you buy between January 1 and June 30, the buyers have to pay their prorated share of the property taxes from the date they own the house through June 30. If you buy after June 30, no taxes are collected until the next tax bill is produced (typically late September in San Francisco). If you buy after the tax bill is produced in the fall, buyers have to pay their prorated share of the taxes from the date they buy through December 31. All taxes paid at closing are at the seller’s tax rate; buyers have to pay more taxes later when San Francisco sends their supplemental tax bill at the new tax rate. Prorated property taxes could be a little as $0 (during the summer), or several thousand dollars, depending on when you buy and the seller’s tax amount.
Closing costs vary between deals by thousands of dollars, but as soon as you apply for a loan, lenders must provide a Good Faith Estimate which will give you a good idea of total cash you will need at closing.
