Why Your Closing Costs Might Cost You More Than Your Down Payment

Certified Mortgage Advisor
NMLS 1701021
November 3, 2021

Why is closing cost so expensive

Now, I'm going to help you understand why closing costs can be so expensive. Who's charging all this money? What are they charging the money for? And then what can you do to actually lower some of these closing costs? So you're in a better position to feel like you actually understand what's happening with closing costs instead of feeling like you see this number and you're unsure of it and you're not sure what's right, and you're trying to figure out, okay, should I actually be paying this? Or what is normal in buying a home.

What is closing cost?

So first, when we talk about closing costs this word can be used interchangeably with different things. So I just want to clear up what this means. So there's actually several things that kind of go into closing costs and the best way to understand this is it's actually going to be your down payment.

Plus closing costs minus adjustments equals cash to close. So closing costs are going to be the charges that are additional to being able to buy a home. It's for all the people involved in the purchase of your home to help you be able to close on it.

Cash to Close

So what we're actually talking about here is the cash to close is that bottom line number. So when you're asking yourself the question of how much do I actually have to bring to the closing table? What check do I have to bring to somebody to be able to purchase a home? That's your cash to close.

Down Payment

So first we have the down payment. The down payment is basically how much money are you putting up compared to how much money the bank is putting out. So this is normally a percentage of the purchase price. So for instance, on a conventional loan, there's a minimum of 3% down. That means. 3% as a down payment and the bank is giving you a loan for 97%. So those equal up to a hundred percent of the purchase price.

So the minimum down on conventional is 3%, FHA 3.5%, USDA at 0%, and for VA it's 0%. So you have the down payment. So maybe we're running with a conventional loan and we're 3% down. On a $100,000 home, that's $3,000, and for $200,000 home. that's $6,000.

Closing Cost

Closing costs are going to be the other fees that are charged here. They're not just miscellaneous fees for or made-up fees, like junk fees. All these fees actually have a purpose.


Then you have your adjustments. Earnest money deposit. If you put money down on a contract that would be subtracted because you already paid for it upfront. And so earnest money is just basically like a good faith offer to the seller saying, Hey, we really want to buy this home.

And we're willing to put, let's say a $2,000 at stake. So if we back out of the deal, that $2,000 is in jeopardy, they're in different states, handled that differently.

Seller Credits

Then you also have seller credits. That's when the seller actually gives you a portion of the money to go towards your closing costs.

Lender Credits

You have lender credits where the lender kind of can do the same. They can give you a credit to lower your closing costs.

Tax Proration

Then tax proration. Every county handles this differently, but basically, this is how much tax is being given to you as a credit at closing. So this all equals to our cash to close.

What is Cash to Close

So when we talk about cash to close, this is just, what is the final check due at the closing table when you sign, when you get the keys? Most of the time, what check is being due here.

What's frustrating about closing cost?

What's frustrating about closing costs is I think sometimes they can seem like, "it's the lender is going to charge me a bunch of random fees". And that's what closing costs are, and that's not the case at all.

Where your money goes

When you buy a home, there are a lot of people involved. So think of you in the center purchasing a home, and think of your money flowing to each company or person getting paid by you purchasing.

What's part of closing cost?

It's not just you and the seller, and your agent, there are a lot of people involved in this. So for instance, you have your insurance agent. They're gonna give you a homeowner's insurance policy. They're getting paid through that as well. That's part of closing costs.

Your lender is helping you secure a loan. That's part of closing. You have a title company doing a title, search, and insurance on your home to make sure there are no problems with the deed, your actual homeownership. That's part of closing costs. You probably have a home inspector looking at your home and making sure it's up to the quality standards you're looking for. That's part of closing costs.

You have an appraiser, who's judging the value of your home. That is part of closing costs. The county is going to charge to record the deed and the mortgage that's protocols and costs. You may have an attorney who's going to review your contract and make sure everything is legal and in your best interest, that's part of the closing cost

You might have a home warranty that is part of closing costs.

What is paid by the seller

Then you do have a buyer's agent and a seller's agent, and they're getting paid, but they're getting paid by the seller. So the seller will pay for a couple of different things here.

The seller normally will pay both the seller's agent and the buyer's agent. They usually come out of their funds. So the seller does have their own closing costs as well.

Yes, you can negotiate with the seller

Then, often the seller in contracts can be negotiated to pay the home warranty and possibly some other things like title fees as well, depending on what's common and all contracts can be negotiated as well.

Why do we have closing cost?

Closing costs are here because there are a lot of people helping you buy a home. Sometimes we forget that there's actually a lot of people involved in just one person buying a home. It's not just you and the seller and your agent. There's a lot of people and companies who end up getting paid through closing costs, and that's why they exist, and they're all needed to be able to help you purchase a home because they all do different things.

Seller will pay you closing cost?

There's one instance where the seller actually will pay you a little bit. You're still going to have closing costs that go to other people, but there's a time when you are also going to get closing costs paid by the seller.

So what's interesting is you will pay the seller and the seller will pay you back as well. So the error going towards the seller is you're paying the money for the home, right? Maybe you're purchasing a home for $300,000 and you're paying the seller that amount of money. However, you can negotiate for the seller to pay closing costs as a credit towards you.

Negotiating Seller Credits

In this sense, this is where you can negotiate seller credits and seller credits are just where you are in the contract. When you make an offer on a home, you ask the seller to pay a percentage of the purchase price towards your closing costs. And it's important to remember the more that you ask for the less competitive your offer is.

Cause think to the seller if the seller has two offers and one person is saying, "I don't need help with closing costs, and the other person is saying, I need $5,000 to help with closing costs". The seller gets $5,000 less over here. They're less likely to go with that offer. So it's important to keep that in mind.

Different loan = Different limits for Closing Cost

So different loan types allow you to have different limits with closing costs. So for a conventional loan here is all of the different concession limits on conventional loans. So basically if you have less than 10% down on a conventional loan, you can do up to 3%, 10% to 25% down is 60%. Greater than 25% down, you can do up to 9%, and if it's an investment property up to 2%.

So you don't have to ask for any, but these are the maximums. So on a conventional loan with less than 10% down, you can not ask for a 4% seller concession. Conventional loans will not allow.

On FHA loans, you can ask for up to 6%. On VA loans, you can ask for up to 4%, and on USDA loans, you can ask for up to 6%. And keep in mind, the more that you ask for the less competitive your offer does become, but this can be a strategy that you use to help lower some of these closing costs.

Loan Estimate

So then what ends up happening is you have all of these people that we talked about earlier, who are helping you close on a home. They're providing all of these services to help you be able to do this. All of these are going to then be itemized on a document called a Loan Estimate.

Your lender is going to prepare this document. That basically is going to give you a map, a general estimate of all of the fees that are happening. Now at this point, your lender doesn't actually know the bottom line number. I know it's frustrating, but the reason they don't is because we have a list of people who you need to get paid under your closing cost.

The lender, day one when you sign your contract, doesn't know what every single one of these people is going to charge for the services that they're going to provide to you. And so winds up happening while you're under contract, which is normally 30 to 45 days, those fees are getting finalized.

What your loan officer will do

So usually your loan officer is getting invoices from the title company, for instance, from your home homeowner's insurance agency, they'll find out what taxes are going to be. They should have a good idea of what it's going to cost to record with the county. So they're trying to finalize these fees. What they would do first is give you a loan estimate.

And the loan estimate is just that it's an estimate of the fees of what they think you're going to run into as the final cash to close. So they're going to, they know what your down payment is based on the loan type. And they're going to estimate your closing costs based on some other information.

And they're required to give this to you three days after you're under contract for a home. So then during the time that you're under contract, they're working on finalizing those fees to give you then a closing disclosure.

Closing Disclosure

A closing disclosure actually has two more pages. The closing disclosure is required to be given to you three days, at least three days before closing.

The closing disclosure is very so much loan estimate, but it should have those fees more locked in. So they're getting more accurate numbers so you can figure out what the total cash to close is.

So normally when it ends up happening is a loan estimate is quoted maybe a little bit higher than an actual beat, and then ideally you'll get a closing disclosure and it should be a little bit less. If you're working with a good loan officer, they should be estimating in a way that helps you understand a good ballpark of where it's at, but in a way where you're not going to get the closing disclosure and costs are going to be more. Because nobody wants that unexpected jump in costs.

Closing Disclosure Walkthrough

In the pages of the closing disclosure, it does have a couple of different, interesting things here. The first thing is it actually compares the loan estimate versus the final closing disclosure fees. So it helps you compare side-by-side what everything is, but then it also uses a system of debits and credits to figure out what your cash to close is.

This can be a little bit confusing and I wouldn't be too concerned about feeling like you have to figure it out. I think it's just interesting to note where are all these numbers coming from and how are they coming together with all this. Because what it is is they're taking basically everything in Section K and then subtracting everything in Section L.

So you have all your debits up in Section K, on the top section, and the credits below in Section L. So for instance, the sale price of the home, $180,000, all of a sudden, right away, we have a $180,000 bill due. Then we have closing costs, $9,000 on top of it. So we have this big bill due well. the loan covers 162,000.

That's removed from the $180,000. Then we also have an earnest money deposit. And so you'll see this on your own closing disclosure where it's itemizing every single thing, and then showing you all the adjustments with it to give you that cash to close. 

How to keep your closing cost low

So at this point, you're probably like, all right, if there's a lot going on with closing costs, there's a lot of people charging, closing costs. How do I keep these low? There's a couple of different ways that we can do this.

Shop Lenders

The first one is to shop lenders. This is the one that most people are coming with, but it's important to realize the lenders only control the lenders fees. If we remember that in closing costs, we need to pay a lot of companies or people. The lender was only one piece of the puzzle.

There are a lot of other people who are charging fees in there as well. Your lender will only control their fees, they cannot control everyone else's fees, but sometimes people have this assumption that they will then shop lenders and the lender will then control all the fees, and that's just simply not the case. The lender will only control their fees. So when you shop with lenders, you only want to see what are your fees.

Section A Fees

These are called Section A fees. It's directly what the lender charges. Because sometimes what can happen is you might talk to one lender, and the loan estimate they're estimating the title company is going to charge $2,000 and you talk with another lender and they're estimating the title company is going to charge $3,000.

Sometimes they will make a mistake and they're like title fees are cheaper with the first lender. So I'm going to go with them. Keep in mind that they're estimating. They don't know what the title fees are. They don't control the title fees. So don't choose a lender based on fees that they don't control. Only choose a lender based on section A fees, the fees that the lender directly controls.

Shop for homeowners insurance for a lower rate

So you can shop for any homeowners insurance that you would like, and you could potentially choose a higher deductible, if that would help you lower that cost as well.

Ask for Closing Cost Credit

You can also ask for closing costs credit from the seller. That is probably the easiest way to get this done. So asking the seller for again, back to that limit, maybe it's 3%, maybe a 6%, maybe it's 4% or anywhere in between.

Ask for Lender Credit

You can also talk to your lender about getting a lender credit.

Look for grants or down payment assistance

Also exploring grants or down payment assistance options with your lender. See if that's something that you have access to.

As for Long Proration

Also something that you can do is ask for long proration if that's not already common in your area, so different counties handle this differently.

So in my area, there's actually a difference between short proration and long proration.

What is long proration

Long Proration basically means is since taxes are normally paid semi-annually or annually, there's going to be a time when you move into the home, you're going to get a tax bill for a time that you weren't in the home.

Proration, what it can do?

So proration is just when the seller at closing is giving you a credit in advance for that tax bullet about to be due. Around here, you can actually do a long proration, which is I'm not going to go into the history of it, a little complicated, but basically, get an extra six-month tax credit from the seller. That can be a really great way to add in some closing costs a credit if you need it. Again, this is all negotiated in the contract. So the seller doesn't have to agree to that.

Explore not getting owner's title insurance policy

Now, this is Risky and optional. But basically what happens is when you look at your loan estimate, you're going to have an optional owner's title insurance policy, and this helps protect you against any errors found in the recording of your deed or of your mortgage, any title issues that you run into, it's going to cover you for and it can be really risky to not have.

Sometimes, if you're really strapped for cash, it could be an option. And usually, title companies will allow you to then purchase a policy sometimes 60 or 90 days after you close on a home. Definitely talk to your title, insurance agent about that because it is extremely risky to do, and you need to make sure you understand the risks of doing it before you actually choose to waive that fee.

Explore a lender credit

What you can ask your lender for it is actually a higher interest rate in exchange for a credit towards your closing costs. If you need help there. And then also look at closing at the end of the month. It doesn't have to be on the last day, but if you do close at the end of. It reduces the amount of prepaid interest that you have to pay in between the time that you close and your first payment is due to help lower closing costs a little bit.

So only probably going to save you a couple of hundred bucks. But if you really need that or you're doing a combination of all these, those can help add up to some pretty good savings for you.

When is all this due?

That is one of the big questions that people have. The cash to close is due at closing. So when you look at your loan estimate or your closing disclosure, you're going to get probably multiple versions of those while you're under contract for a home. And those that bottom line cash to close is not due until closing and closing looks different for different lenders and different people. But normally what standard is you come to a closing table, there's a closer there, maybe your lender or your realtor is there. You bring a check for your cash to close. So this would be a cashier's check or a wire transfer and that money is due at the closing table.

Due Upfront

However, there are a couple of charges that are required upfront. So something like the appraisal that's due upfront. If you have a home inspection, usually the inspector is going to require to be paid upfront. Then if you have earnest money that is as well, it doesn't get applied as a credit towards your closing costs since you already paid it, but it is due upfront. Everything else like your down payment and all other closing costs is only due at the closing table.

Can closing costs be rolled into the loan?

The disappointing answer for most people is going to be no. So for instance, on a conventional loan, no. FHA loans and VA loan, no. You can not roll closing costs into the loan. So if you're purchasing a $300,000 home and your closing costs are $9,000, you can't just say, give me a loan for $309,000, it does not work that way.

USDA and closing costs

The only instance, when you can do this actually can wrap closing costs into a loan is on a USDA loan. If you have a USDA loan and you're purchasing a home for $300,000 and it appraises at $310,000, you actually can wrap up to $10,000 of closing costs into the loan.

How to wrap your closing cost?

The only way around this is to wrap closing costs into the purchase price. So the way that you would do this is if you're looking to buy a $300,000 home and you need, let's say trying to think of a, an easy, let's say $9,000 in closing costs. So you want that as a credit from the seller that's 3%. So you can then ask the seller for 3% of the purchase price and closing cost, but you're then going to offer $309,000.

So what you would then do is increase the purchase price to be able to get that closing cost credit back. So instead of offering 300,000, we offer $309,000 and ask for $9,000 back in closing cost credit.

Refis are different

Now, one important note is refinance are different so if you're purchasing a home, you cannot wrap closing costs into a loan. If you're refinancing, usually on most loans, you can wrap some some amount of closing costs into the loan amount, but refis are completely different story.

So what have you can't use all of the seller credit?

So let's say the seller gave up. $9,000 in closing cost credit. But we are closing costs are only $8,000. So we have a thousand dollars leftover. What do we do?


One thing we can do is renegotiate. So we can just make our realtor have an addendum to the contract that says we're going to lower seller credits from 9,000 to 8,000. And maybe if you want lower the purchase price by a thousand dollars. That's something we can do is renegotiate because we don't need all that closing costs credit anymore.

Lower rate by points

The other thing that we could do is we could purchase points. And what you do there is it's the inverse of a lender credit. So instead of asking for a higher rate and a credit from the lender, we actually asked for a lower rate, but we're willing to pay to think that prepaid interest. We paid to lower our interest rate. That is something that you can do if you have closing costs concessions from the seller leftover.

Do different loans, have different closing costs?

For the most part, no. Because if we think of things like a title, home warranty, appraiser, all those types of things usually are not going to change in cost between the different loan types.


However, the main thing that you will see as closing costs change is anything with upfront mortgage insurance. So FHA loans, VA loans, USDA loans, all have their own type of mortgage insurance that is charged upfront.

Usually, conventional loans don't unless you choose to have upfront mortgage insurance on a conventional loan. So for instance, on FHA loans, there's going to be 1.75% of the loan amount added to the loan as upfront mortgage insurance costs, VA has a funding fee and then USDA has what they call a guarantee fee as well. Doing that will change your closing costs. However, those fees are usually added to the loan and you won't pay them upfront.

So I know this is a little confusing and overwhelming, it's okay. It's okay to be there. It's okay to be like, "I have no clue what's going on. This is frustrating and it's a lot of information".

Main goal

Really the whole goal here is just to help get you acclimated to some of these numbers because your loan officer will be able to guide you through a lot of these fees as well when they give you a loan estimate.

Do you have to prove that you have the money?

So for most people, yes. And normally what a loan officer will ask you for is two months of your bank statements. So what they want to see is that you didn't go take out a personal loan for your closing costs or your down payment. And since 2001 with a Patriot Act, they also have to check for instances of fraud or money laundering, which can be very frustrating that you have to show so much information for your bank statements, but what you will need to do is have two months of bank statements to show that you have the money there.

It's a lot easier to give this to the lender as early as you can in the transaction so they can make sure that they can see all the money is in your account. So for instance, if your cash to close is going to be $20,000, the lender then needs to see bank statements that would show the $20,000 in an account so that they know that money is from a source that they accept and you'll have the money ready for closing.

How do you estimate these fees?

One quick and easy rule is 2% of the purchase price. For a $300,000 home, 2% would be $6,000. And so you can estimate $6,000 as your closing costs, probably a decent rule of thumb, but it's not as refined as you probably would want it to be.

Loan estimate explainer

Another option is there is a loan estimate explainer, here's the link: https://www.winthehouseyoulove.com/max-purchase-price-calculator. They'll help you take a look at a sample loan estimate and see what sample fees can look like.

Talk to a lender

You can also talk to a lender and ask them to give you a quote for closing costs as well. And they can itemize and estimate all these other fees.

Talk with a loan officer
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