Closing costs are fees lenders charge to process your loan. They are separate from your down payment and are important to understand since they affect how much money you need to close on your loan.
What are Closing Costs?
Lenders charge closing costs to cover the cost of the tasks involved in closing your loan. Underwriters need information to determine if you qualify for the loan which involves services from third parties. Most closing costs are 3% – 5% of the loan amount.
Types of Closing Costs
Each lender charges different closing fees, but here are the most common:
- Origination fee
- Discount points to lower your interest rate (optional)
- Underwriting fee
- Processing fee
- Closing fee
- Credit report fee
- Title search fee
- Title insurance fee(s)
- Appraisal fee
- Attorney fees
Some closing costs you can control, by choosing your own servicer, but most lenders have preferred vendors they use. When you apply for a loan, lenders must send you a Loan Estimate within 3 business days. The Loan Estimate details the closing costs so you can compare your options to other loans too.
Who Pays Closing Costs?
Typically, the buyer (borrower) pays the closing costs. But you can work it out with the seller to help with closing costs in many cases. Some loan programs including conventional, FHA, and VA loans allow sellers to pay all or some of your closing costs.
How to Lower your Closing Costs
The good news is you have some control over your closing costs. Here are a few ways.
Provide Good Qualifying Factors
A borrower with great credit, a low debt-to-income ratio, and a large down payment will likely pay fewer closing costs than a borrower with a low credit score, high debt-to-income ratio, and low down payment.
It all comes down to risk. Lenders charge higher origination fees to borrowers who are ‘high risk’ and lower or no origination fees for less risky borrowers.
Shop Around for the Best Deal
Get at least 3 quotes from lenders to determine which loan is best for you. Compare not only the interest rate and payment but the overall loan costs. Sometimes a higher interest rate and lower closing costs have a lower bottom line.
Look at the big picture – how much will the loan cost you over its lifetime?
Negotiate with the Seller
Many sellers will help with your closing costs. If you can’t afford 3% – 5% of the loan amount plus your down payment, ask the seller if they’re willing to contribute to your closing costs. Many sellers will help to get the loan closed.
Closing costs help you get the loan you need. Lenders must charge the fees to cover the cost so they can keep writing loans too. You shouldn’t pay excessive fees, but most everyone pays some closing costs to get to the closing table. Shop around to find the best deal and look at the big picture, not just the interest rate or fees, but all of it together.