The Complete Guide To Home Buying Closing Costs

Certified Mortgage Advisor
NMLS 1701021
Published 
August 22, 2019

Details about home buying closing cost

Today, we're going to cover the complete guide to home buying closing costs. We're going to take a deep dive into this whole mystery of closing costs and everything that goes into buying a house in terms of how much you actually have to bring to the closing table.

Possible problem we might encounter

So here's the big problem that you might run into. Already have run into this number one, the whole world of closing costs, and all the fees that are charged with closing on a deal can be really confusing. And then number two would a lot of lenders do is they take advantage of the fact that fees can be hidden in a whole midst of other documents and they can charge extra fees.

So if you're going to make sure that you're purchasing. As the best decision, the best investment possible for you, you really need to know what's going into your fees. So here in a second, what I'm going to do is I'm going to walk through line by line at two different real-life examples from loan estimates that I've sent to clients of mine. I'm going to show you one loan estimate for Ohio on an FHA deal and another loan estimate for Tennessee with a conventional deal.

What is loan estimate

So let's back up for a second. What's a loan estimate. A loan estimate is a document that's going to detail every single term and cost and fee that goes into your loan. It really is the document that sets up how your loan is going to be structured when you're buying a house.

So the federal government requires that you receive a loan estimate three days after you receive a contract on an accepted offer. So the document that I'm going to show you will look the same, no matter what lender you're working with. And what I do with all of my clients is I go through a personalized video review of their loan estimate line by line so they understand everything very clear upfront. So they're comfortable with the loan that they're going to be getting into.

Because there's no point in getting under contract and going through the whole process and then closing. And then all of a sudden you have surprise fees that you didn't know were there, or you have a monthly payment that you weren't expecting.

No more surprise fees

So I try to prevent that by making sure that my clients know the numbers up front. And I want the same for you. I don't want you to run into surprise fees or things that you didn't know. We're going to happen because honestly it's a little terrifying to think that I run into a lot of clients who were working with other lenders that they started to not like anymore, and they switched over to me and I would ask them questions about how much were you looking at putting down? What was your monthly payment? What was your rate with a slender? And they have no clue. And so what ends up happening is they get to the closing table and they say, I can't believe this lender raised fees on me. I can't believe my monthly payment is this. They told me it was going to be this.

So the loan estimate and knowing it back and forth is going to help you out a lot. It's going to help you be able to negotiate the best loan, the best rates, the best terms for you as well. So again, we're going to dive into two examples. We're going to do an Ohio loan that is an FHA loan and a Tennessee loan that's conventional, so you can see differences between two states and differences between two loans, and how they're documented that way. You can get a good grasp.

So you can jump around to either the Ohio FHA or the Tennessee conventional if you want to look at those different states. So let's go ahead and get to the loan estimate walkthrough.

Ohio FHA loan estimate

All right here we are with the first loan estimate. This is for Ohio with an FHA loan. This loan estimate is a loan estimate that is sent to a client of mine. And I'm going to give you a walkthrough of exactly what I gave to him to show him all the terms and details of his loan.

Here is the walkthrough

So you're going to see a loan estimate at the top. Your lender is going to be listed in the upper left corner of the document. So your lender is going to be listed also at the upper left corner. We broke her loans, so I put them through a specific lender. It's going to show you, obviously who's applying. So this is going to be your name, your address here, and the property that you're purchasing as well.

So this is in New Carlisle Ohio. It's going to show you your purchase price. You've probably already seen this from the contract you signed with your real estate agent. Also, it's going to show you your loan term. So are you taking a 30-year loan? You take 15 years, 20 years, 18 years if you want to get a little wild.

It's also going to show you your purpose. Your purpose is the purchase. So is this going to be a purchase? Is this going to be a rate and term refinance? Is this going to be a cash-out refinance? Also your product, it's important. Is it going to be a fixed rate? Is it going to be adjustable?

You want to know how your loan is going to look over a long time period. So make sure that if you want a fixed rate, that it says fixed-rate here, and that you're not getting put into an adjustable-rate mortgage, that's going to change in the future.

Also, your loan type is going to be listed. So whether you're going conventional, we're going FHA, VA, or other. This might be a USDA loan or a portfolio loan.

ID Number

Also, you'll have a loan ID number. This is so the lender can keep track of which loan is which.

Rate Lock

So your rate lock is basically telling you what your rate is doing until you close. So rates can either be locked or floating. So if your rates float, it means that it's moving with the market until it's locked. And if it's locked, it's going to stay in one place the entire time. So then once you close. Then what happens is your default to the product that appears. Let's say, right now we're locked and then once this person closes, he's going to have a fixed rate.

Benefits of locking and not locking the rate

So if it says no rate lock, you can still have a fixed-rate loan. It just means that it's floating until you lock the rate. So some of the benefits there on locking versus not locking are your lender might be able to help you get time to market to get the best rate possible.

Loan amount

It's listed very close to your purchase price. So we can see for this person it's $255,290, and then beside it, it lists "Can this amount increase after closing?" Big old, "No", which is awesome. The interest rate has a 3.99%. Can this increase after closing? "No". Monthly principal and interest, this is going to show him what he's going to pay in monthly principal and interest. So it's $1,217.32, and it cannot increase after closing.

Prepayment penalty

This means can you prepay into the equity of the loan with any costs or fees? And there is no penalty here, which is wonderful.

Balloon Payment

A balloon payment is basically where you have your loan for a certain term. And then the entire portion is due after a specific number of years. For most loans, it's not the case. Those used to be a couple of years ago, but they're not so much anymore. These are what are called risky features. So if your loan says, yes, to any of these, you might want to talk with your loan officer about them. We don't do any loans with risky features like that, just because they are risky and dangerous for our clients. So we make sure that they do not exist for these loans.

Projected payments

So you can see a payment calculation. We can see in years of one through 30. So the entire duration of the loan. This person's going to be paying principal and interest of $1,217.32 mortgage insurance for FHA of $176 per month. Estimated escrow, so this is his taxes and insurance for $384 per month. That gives them an estimated total monthly payment of $1,777 per month. Then again, $384 a month in taxes and insurance in the escrow account.

Closing cost details

Complete guide to closing costs in Section A this is origination charges. So these are the fees and costs that are in direct correlation with your lender.

Section A

So Section A is going to be your lender's fees. So if you're going to see fees charged by your lender, For this specific loan, we didn't charge any fees. There was no underwriting fee, no points nothing like that here for this borrower.

Section B

In section B, these are going to be services you can't shop for. So these are services that are required. But it doesn't mean that your lenders charging them. They're most likely charged by a third party. But they're going to be required to close on your loan and you don't get to shop them around.

So for example, you have an Appraisal Fee that's $500, that's paid to an appraiser. A Credit Report Fee that's going to be paid to a credit report company, Flood certification, and this MERS fee, this is like a backend technology fee is going to be paid to most likely a company like CoreLogic to be able to handle that.

There is FHA's upfront mortgage insurance premium. So something strange about the way FHA works is they have upfront mortgage insurance put into their loan amount. So this isn't a fee being charged at closing. This is a fee put into the loan amount charged by FHA. Again, this is something that would be charged by CoreLogic or another third-party company.

Section C

This is what our borrower would expect for title costs. So title costs are basically paying for a title company to do a search of the title of the property. So who's owned the property over a period of time, and they're going to make sure that when you sign at the closing table, that you're the sole owner of that property, they're making sure that nobody else has a claim to that property.

For example, we just closed on a deal a month ago, and the title company did a search and found there was an extra a hundred thousand dollars mortgage on the property that was recorded incorrectly. So that means if the buyer closed it without going through a title company, then they would have been on the line for an extra a hundred thousand dollars from some other person from 1992.

So title companies protect you from that. They help you spot those errors. They correct those areas for you and make sure that the title is clean for you. And then they'll ensure the title of the property as well.

Section E

This is where we'll see taxes and other government fees. So these are normally going to be recorded or charged by the state or the county.

So for instance, this county charges a recording fee of about $316. Ohio has no transfer taxes. So he didn't have to pay anything.

Section F

This is where you're prepaying specific items of the deal. So for instance, getting a mortgage, you're going to pay 12 months of homeowners insurance upfront.

So for the 12 months for him, this was $1,080 here. And then you'll also be paying prepaid interest. So we can see he paid $27.91 per day for 15 days at 3.9, 9% is $419. So prepaid interest is when. Is the interest that's calculated from the time that you close until your first payment is due. And the reason prepaid interest is collected is that there's always a month gap between when you close and when your first payment is due.

So the lender wants to collect that interest for that time period. So you don't have to make a full mortgage payment in that month because you have the prepaid interest.

Section G

This is where your escrow account is getting set up. So the escrow account is taking bigger payments and breaking them down into small monthly chunks.

Kind of think of it like a Netflix subscription for your taxes and insurance. So all the convenience of Netflix with none of the fun, because it's paying taxes and it's paying insurance. So per instance, homeowners insurance is usually paid annually. If everybody paid annually, then they would have these big lump sum payments for in this instance, thousand dollars annually.

Sometimes people aren't great at budgeting for that. So escrow helps you take that 1,080 and break it down into instead of 1,080, just pay $90 per month added to your mortgage payment. And then what you do is the escrow account helps you set up a little bit of a cushion so that you always have money left in there in case insurance or taxes increase or in case you're behind on a payment, your mortgage and taxes are always current.

So in the escrow account, we collected three months of homeowners insurance and about five months of property taxes.

Section H

This is where you're going to find other fees that don't fit into these categories. So for instance, the realtor on this deal had a transaction fee that they charged for $495. And also the buyer had an option to purchase the owner's title insurance. You can see this was optional for them. This protects them in the future. It basically ensures the title from the title company saying, in case the title company made a mistake, then this insurance policy protects them against that error.

Section J

You can actually see that we gave this buyer a lender credit. So we gave them. Here towards their closing costs. We give them $1,080 to help bring down their closing costs.

Calculate

Then, what you do is you take everything and you calculate your cash to close. So the total cash is due at closing.

So we would take our total closing costs. Then we would take the down payment. The mortgage insurance upfront premium was actually taken out of the down payment. It's a little tricky, but since this is an FHA loan, there was a required minimum 3.5% down payment. So that down payment minimum is actually $9,100.

So instead of having $9,100 listed here, the way this is listed on the loan estimate, and sometimes it's a little bit different, but this upfront mortgage insurance premium was taken out of the down payment funds. So the buyer is still bringing the minimum down payment. It's just listed in a slightly different way.

Seller Credits and how to get it

The buyer also put down an earnest money deposit of $2,500 and negotiated $0 in seller credits. So you can get seller credits when you negotiate your offer. So when you put in an offer. Talk with your realtor about the possibility of seller credits. That's where you get some money paid by the seller to pay down some of your closing costs.

Then the buyer also got a credit for some tax per ration, since taxes are paid semi-annually he got credit for some of the taxes during the time that the seller was in the property. That gives him his estimated cash to close, so his bottom line number was $11,932.

Lender giving credit?

So something that you'll notice is that the struggle here with loan estimates is since the lender is the one that has to give it to you, it can feel like the lender is charging all of these costs. But if you looked at all of these sections, we charged zero fees. We actually gave our buyer a credit here of a thousand dollars. So more than not charging anything, we gave them a credit.

Look at the details

So make sure that you do a detailed look at what are these fees, are they required and who are they being paid to? That way you can get a better understanding of, are there things that you can shop for or negotiate in your deal as well? So talk with your loan officer about that.

Additional Information About This Loan

Then if go to this third page of the loan estimate here, it's going to tell us a little bit more detail about some of the terms of the loan.

It's going to show us some comparisons. So in five years, it will show you the amount paid in principal, interest, mortgage, insurance, and loans. And this is the amount of principal that's been paid off. So in five years, this buyer will have paid off about almost 25 closer to $24,000.

APR

The APR or Annual Percentage Rate. So this is the cost of the loan term expresses a rate. So this is a mixture of all of the financing charges with all the costs and fees.

Total Interest Percentage

Then the TIP or Total Interest Percentage. So this is the total amount of interest that you'll pay over the loan term as a percentage of your loan.

Other Considerations

This also shows a couple more details, Things about your appraisal. If your loan can be assumed by someone else homeowner's insurance requirements would a late payment charge will be refinancing and what that will look like and then the servicing of the loan. So who's going to accept payments. So that is about it for the Ohio FHA deal. We went into pretty detail.

Tennessee Conventional Loan

On the next one, we go through Tennessee on a conventional loan, I'm going to jump through things a little bit quicker. We won't have to go as in-depth, since a lot here, we'll just talk about some differences on the Tennessee deal. So that's coming. Here we are with the Tennessee deal with a conventional loan.

We're not going to go as in-depth, we're just going to do another high-level view of the loan estimate. Let's also talk through some differences from what we saw from the FHA deal in Ohio. So again, everything's pretty similar. The document looks exactly the same, showing us our loan estimate.

Tennessee, Conventional Loan

For the properties in Murfreesboro, Tennessee, we have a purchase price of $196,000. The loan term is 30 years on a purchase of a fixed-rate, conventional loan. And the rate lock is not there yet, it's floating. So when I did this deal, I sent it to them and floated the rates so that I can get a better market timing to get them a better interest rate.

So somewhere along before we closed, I locked that deal. That way they had a fixed rate for the life of their loan. So they had a loan amount of $166,600 in the interest rate of 4.375%, a monthly principal, and an interest payment of 831.81 per month. No dangerous features here on their loan. Something different here from the last deal. The last deal only had a time period of year one to year thirty.

Split: why?

Now what's different here is that this is split into different terms. And the reason why is because mortgage insurance actually dropped off here so we can see their principal and interest is the same throughout the entire duration of the loan. Their escrow, so their taxes and insurance are the same for the entire duration, but in years, one to five, they have mortgage insurance of $21. Since they put less than 20% down. Then in year six, they hit 20% equity in that $21 fell off, and we can see that reflected in the estimated total monthly payment as well. We can also see their taxes and insurance of $189 a month in the escrow account.

If we get to closing cost details, we can see section eight charged by us the lender. We had an underwriting fee for this deal of 995. Similar to the other deal. We had an appraisal fee, a credit report fee, a flood certification, and a tax service.

Upfront Mortgage Insurance

Something that's not listed here is any mortgage insurance because conventional doesn't have upfront mortgage insurance. It only has monthly mortgage insurance. So something to note there.

Understand your state

In section C here again, this is what we estimated the title company would charge. In section E, they had a recording fee to the county. But something a little bit different than the Ohio deal is that Tennessee has transferred taxes where Ohio doesn't. So in Ohio, the seller pays the transfer taxes in Tennessee. The buyer pays the transfer taxes. So something to keep in mind there is an understanding of your state charges transfer taxes to the buyer or the seller.

Prepaids

They had homeowners insurance listed, and prepaid interest as well. Their escrow account was also set up about three months of homeowners insurance in six months at property taxes and the number of months varies based on when you're closing during the year, we have a calculator that helps us make sure we have all the money we need to end the escrow account. So that might change depending on when you're closing.

Section H

We can see that this person's buyer or this person's realtor had a broker fee charge of $150. There was also a transfer fee charged by the homeowners association company for $250, then they also had an optional owner's title policy for $166. And with this example, we gave them a credit of $1,056 as well.

Estimated Cash to Close

Then we can do the same thing as we're calculating the cash to close. This is a little bit different than the other deal is if we have total closing costs, then we add on the down payment so we can see our buyer brought a good down payment here.

They also contributed an earnest money deposit. So the earnest money deposit is something that you would pay upfront when you accept the offer. And this shows a seller that kind of you mean a business that you really want to close the deal that you're willing to put money up front and put it at stake saying that you're going to be bound to this contract and you put some monetary value behind it as well.

The seller was contributing $1,500 here. So that's a credit that they received. Then they got a tax proration credit for $900 and that gave them their estimated cash close of $32,068.

Details of the Loan

So if we go to page three, again, this shows them some more details about their loan and some of the financing costs some other details about payments, refinance, and services, and then they have the chance to sign the receipt here as well.

So hopefully this gives you a good idea of closing costs. We covered a lot and the more that you understand the terms and the cost and the fees going into your loan, the better you're going to be at making a judgment call on, is this a good loan or is it not, or are there ways that you can decrease some of your closing costs or change the terms of your loan so that they fit you better?

Your Mortgage Advisor should show you your loan estimate

Ultimately, the mortgage advisor you're working with should be showing you all of this information up front and not hiding anything in a whole slew of a bunch of other disclosures. So if you haven't seen your loan estimate in your under contract, ask for it, make sure that somebody walks through that line by line with you, so you're comfortable and understand everything that's happening.

I hope this added some clarity to the loan estimate. Thanks.

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