An Inside Look at Closing Costs and How They Protect You

In this article

1. Key Takeaways
2. Application Fees
3. Appraisal Costs 
4. Home Inspection Costs 
5. Underwriting and Loan Origination
6. Title Search Fees and Transfer Tax 
7. Closing Cost Help for the Experienced or First Time Home Buyer

Figuring out a home’s affordability isn’t as simple as looking at the sales price and weighing it against your budget. When you decide to move forward with a purchase, you’ll have to pay closing costs. These can range from 2% to 5% of the loan amount. 

Whether you’re a first time home buyer or have been through the process before, closing costs can come as a financial surprise. Some people are so caught up in the excitement of buying a home that they don’t see them coming. 

However, these costs aren’t a bad thing. Paying them helps you mitigate risk and ensure a smooth transition into home ownership. A good lender will help you understand these fees or provide closing cost assistance to help you save money. 

Here’s a breakdown of the most common closing costs and what they cover. 

Key Takeaways

• Closing Costs: These costs can range from 2% to 5% of the loan amount and include various fees to ensure a smooth transition into home ownership by mitigating risks.
• Application Fees: A non-refundable fee for processing your loan application, including a credit check.
• Appraisal Costs: A licensed appraiser evaluates the property to determine its market value, ensuring the asking price is fair. Costs vary based on location, size, and type of loan.
• Home Inspection Costs: A professional inspector assesses the home’s condition to identify any unseen damage, which can affect negotiations with the seller.
• Underwriting and Loan Origination Fees: These include evaluating financial risk and preparing legal documents, ranging from 1% to 2% of the total loan amount.
• Title Search Fees and Transfer Tax: A title search confirms legal ownership and checks for liens or claims. Transfer tax covers the legal transfer of the property and is a small percentage of the home’s sale price.

Application Fees

When you apply for a home loan, your lender charges a one-time fee that becomes part of your closing costs. This initial fee covers the administrative expense of processing your application, including running a credit check. 

Because lenders have to put in the initial work to review your application, this fee is usually non-refundable. As a first time home buyer, you may be caught off guard by this expense so early on in the process. However, an application fee is a small price to pay to know upfront whether your credit is strong enough to proceed with the home-buying process. 

Most lenders charge a flat rate for application fees, regardless of your situation or the type of loan you want. Some lenders will discount your fee, so it may be worth shopping around to save money. 

Appraisal Costs 

Having a home appraised protects you and the lender. The process involves a licensed appraiser evaluating the property to determine its market value. This ensures the asking price is fair and lets the lender know they’re not approving you for a loan that’s far above the value of the home. 

The costs include hiring the appraiser to visit the property to do a thorough inspection. To get an accurate value, they need to examine the roof, foundation, plumbing, appliances, and all major features of the home. They also look at home improvements that could add value. 

After the inspection, the appraiser looks at the home market in the area. They factor in surrounding home values when determining how much the property is worth. After that, they create a report with their findings. 

If the appraisal uncovers that the home’s value is less than the asking price, you have a few options. You can negotiate with the seller for a lower price. Or, you can walk away from the deal if you have an appraisal contingency in place. 

The cost of an appraisal depends on a home’s location, size, and amenities such as a swimming pool. It also depends on the type of loan you’re getting. For example, government-backed loans have guidelines that require a more exhaustive appraisal.

Your lender will bundle the appraisal fee into the closing costs. However, you have the option to pay upfront if you’d like. 

Home Inspection Costs 

Another important step that helps mitigate risk is a home inspection. This process may sound similar to an appraisal, but the purpose is different. 

An inspection helps you determine the condition of a home before moving forward with the deal. You’ll have to pay to hire a professional inspector to do a walk-through and create a detailed report. 

If you’re a first time home buyer, this may seem like an unnecessary cost, especially if the property seems to be in good shape. However, sellers often have no idea that their home has unseen damage. 

Some of the primary elements of a home inspection involve: 

• Testing the condition of the HVAC system 
• Ensuring the electrical system is up to standards 
• Checking for leaks or damage to the plumbing and hot water heater 
• Inspecting the exterior for foundation issues or structural problems 
• Looking for interior leaks, cracks, or deterioration 
• Testing all appliances 
• Ensuring the home is safe 

If the inspector finds issues with the house, you may be able to negotiate with the seller for a lower asking price or request that they make repairs. You can also walk away without losing any money if there’s a home inspection contingency in place. 

Like an appraisal, the cost of a home inspection depends on the house’s location and size. Expect to pay anywhere from $350 to $450, which gets rolled into your closing costs. 

Underwriting and Loan Origination

A big part of the loan approval process involves evaluating risk. This is done by your lender’s underwriter. They’ll take a hard look at your current financial standing and credit history along with the property you want to buy. 

Underwriting fees vary based on the lender and how complex the loan application is. The expense, which can be anywhere from $300 to $1,000, is wrapped into your closing costs. 

Origination fees include several smaller costs. Each lender has different policies, which means your fees will vary depending on who you work with. If you’re a first time home buyer unfamiliar with the process, you may want to shop around to find the lowest rate. 

Here’s a breakdown of what most loan origination fees consist of: 

• Reviewing and processing your loan application
• Determining your creditworthiness by pulling your credit report
• Evaluating risk based on your financial standing 
• Preparing the necessary legal documents 

Your loan origination fees can be anywhere from 1% to 2% of the total loan amount. This may sound like a lot, but it’s an important step in getting the best mortgage available to you.  

Title Search Fees and Transfer Tax 

Before buying a home, you need to confirm its legal ownership and find out if the title has any liens or claims attached to it. This requires a title search, and it protects you from potential costs or legal issues down the road. 

A title company or attorney performs the title search by examining public records. They prepare an abstract of title, which highlights things like previous owners, easements, outstanding property taxes, or lawsuits related to the title. Without a title search, you could end up financially responsible for these problems. 

The results of the search inform you and the lender whether title insurance is needed. This protects you and the lender from any future disputes. 

The cost of hiring a title company or attorney to perform the title search depends on the state. You can expect to pay anywhere from $100 to $250, which will be part of your closing costs. 

Finally, you’ll need to pay a transfer tax, which is a fee for legally transferring the property from the seller to you. This fee is imposed by state or local governments and is typically a very small percentage of the home’s sale price. 

Closing Cost Help for the Experienced or First Time Home Buyer

The Moreira Team will help you better understand closing costs so you know exactly what you’re paying for. Our experienced team will help roll closing costs and unexpected fees into your mortgage. We’ll also advise you if negotiating these fees with the seller is an option. 

Whether you’re a first time home buyer or have bought before, we’ll provide innovative solutions that fit your situation. 

Use our closing cost calculator to get an estimate of what you’ll pay and contact us with any questions.