Rising home prices, stringent loan requirements, and hidden fees can make a lot of people question whether or not buying a house is the right move.
Good news: It doesn’t have to be scary. In fact, we believe homeownership should be as simple as possible. That’s why we’re here to answer the questions every potential buyer seems to ask when going through the process.
Today, we’re talking about closing costs and answering the question that’s on everyone’s mind: When are closing costs due?
But First: What Are Closing Costs?
You found the house. You got the loan. What else is there to do but sign the paperwork and move in?
Turns out, buying a home isn’t like your typical purchase where you see something you want, throw some cash down, and call it yours. The powers that be decided buying a home should involve more steps, more time, and more money.
These additional steps and costs are what we in the industry call “closing costs.” And while they’re necessary for general peace of mind—yours, the seller’s, and the lender’s—they can be a little convoluted and, for some, quite confusing.
Here’s the gist: Closing costs consist of a variety of charges for services and expenses required to complete your mortgage. These costs may include property fees (appraisals and inspections), loan fees (for applications, attorneys, and origination), insurance fees, title fees, property taxes, and even postage fees.
The number of closing costs may vary, which is why it’s important to make sure all closing costs are included or itemized on your loan estimate and closing disclosure. In fact, they’re required by law to be disclosed and agreed upon in advance. That’s why you want to partner with a dependable lender with transparent processes (hint: that’s us).
What Kind of Closing Costs Can You Expect To See?
The list of potential closing costs is long, and while we’d love to define all of them for you, you’re not here for a novel. Instead, we’ve assembled this handy little list of definitions for the most common closing costs to look out for. Happy reading!
- Appraisal Fee: Before you buy, you and your lender want to make sure the home is worth what you’re paying. Your appraisal will determine that.
- Discount Points: These “fees” are optional–you might choose to pay more to lower your mortgage interest rate. Get in touch with our loan experts to find out more about discount points.
- Escrow Fee: This fee is paid to a third-party escrow (or title) company that holds your deposit on the home (your earnest money). This deposit will be applied to your down payment or other closing costs on closing day.
- Origination Fee: This is what a lender or broker charges for their services, usually around 1% of the loan amount, and may be negotiated.
- Prepaid Taxes & Insurance: Many mortgages require borrowers (that’s you) to pay taxes and insurance premiums for up to a year in advance. Take note: These costs may get lumped into your escrow account too.
- Title Insurance Fee: This one varies in cost but is used to ensure the property you’re buying can actually be transferred to you.
- Underwriting Fee: This fee pays for the documentation, coordination, and filing it takes to complete your underwriting process and loan approval.
How To Reduce Your Upfront Costs
As if taking out a mortgage for your home wasn’t expensive enough as is, adding on the down payment and closing costs can be a lot for some borrowers to swallow. If you don’t have all the cash for those costs on hand, you may be able to roll them into your actual loan.
We should warn you that rolling closing costs into your loan is (typically) only a viable option for refinancing—not purchasing. For our refinance readers, here’s what you ought to know:
Rolling closing costs into your refinance is fine so long as those costs don’t push your loan amount over a lender’s LTV (loan-to-value) and DTI (debt-to-income) thresholds. Those numbers may not be adjusted to accommodate rolled-over costs.
For the folks who are looking to reduce their immediate upfront costs on a purchase, don’t worry—you still have options:
- Scaling back on that down payment and using some of that money for your closing costs is one way. Your monthly mortgage payment will go up, but you’ll lessen the blow of one-time closing costs. However, we should warn you that reducing your down payment will increase your loan-to-value ratio, or what we in the industry call “LTV.” Once that ratio passes a certain threshold (80%) you’ll be required to pay private mortgage insurance (PMI).
- If trimming your down payment isn’t as palatable, you might want to negotiate seller concessions. “What’s that?” Glad you asked—a seller’s concession is when the seller (obviously) agrees to pay certain fees on the buyer’s behalf. Concessions might be tricky to pull off, and you may want to throw any money you save on the closing costs at your down payment.
- If neither of those options work (and if this is your first time buying a home), explore the option of pursuing first-time homebuyer assistance. Saving up for these costs and associated fees is a lot to ask of a person, but there are grant and loan options available to help you combat these hefty upfront costs.
“Gotta Know” Glossary:
- Loan-to-value ratio: This is the number lenders use to calculate their risk on a loan. How is it determined? Take the loan amount and compare it to the market value of what the loan is funding. For conventional loans, if the LTV is higher than 80% you’ll have to pay for private mortgage insurance.
- Debt-to-income ratio: This is the percentage of monthly income spent on debt payments (credit cards, car loan, etc.). Lenders usually like this number to be at, or preferably under, 40%.
When Are Closing Costs Due?
This seems like an easy answer, right? “At closing,” you might say. But as with anything mortgage-related, there’s a more complicated answer that you need to know.
The list of closing costs is exhaustive (and between us, a little exhausting), and can be broken into two categories: “Before closing” and “at closing.” Here’s a list of common closing costs and when they’re due:
- Appraisal fees
- Inspection fees
- Application fee
- Attorney fees
- Credit report fees*
- Flood zone certification fee
- Government taxes and fees
- HOA (homeowners association) dues
- Home insurance fees
- Mortgage insurance fees
- Processing fees
- Property taxes
- Title fees
- Underwriting fees
Your team—consisting of your lender and your real estate agent—can help guide you through a complete list of which closing costs are due at what point. That being said, you can rest assured that most of your closing costs will, in fact, be due at closing. Just be sure to set aside a chunk of cash for the handful of fees that aren’t.
*Some lenders may collect this fee before closing.
As if taking out a mortgage for your home wasn’t expensive enough as is, adding on the down payment and closing costs can be a lot for some borrowers to swallow.
Ready to Get Started?
Now that you know more than you likely ever wanted to know about closing costs, it’s time to get started on your purchase. Check out our calculator to find out how much you can expect to pay each month, or connect with the experts at Cardinal Financial today to secure a loan with favorable terms and total transparency. We’ve got you covered from application to closing—count on it.