Buying a home is an exciting journey, whether it's your first time or you're a seasoned homeowner. However, one of the less thrilling but crucial aspects of purchasing a home involves understanding closing costs. These fees can be somewhat perplexing, regardless of loan types. In this article, I’ll breakdown these costs helping you prepare financially for your next big step that will, hopefully, prevent sticker shock when you receive your closing disclosures.
What are Closing Costs?
Closing costs are the various fees and expenses that buyers and sellers incur during the transaction process of buying a home. These costs can include fees charged by lenders, title companies, appraisers, and other involved parties. Additionally, lenders tend to overestimate closing costs at the beginning of the loan process when they issue the initial disclosures. This happens because a lender cannot charge you more when you are issued the final closing disclosures, so they err on the conservative side. For both first-time and recurring buyers, understanding and anticipating these costs is essential for a smooth transaction.
For this article we’ll focus on conventional and VA home loan closing costs.
Conventional Loans
For those using conventional loans, closing costs typically range between 2% and 5% of the home’s purchase price. These costs can vary widely depending on the location of the property, the type of property (single family home, condo, etc.) and the loan type. Common fees included in closing costs for conventional loans are:
- Loan origination fees: Charged by the lender for processing the loan. Pay close attention to this section (specifically Section A on the Loan Estimate). These, in addition to the rate, are lender specific, and are the primary items lenders control regarding closing costs.
- Appraisal fees: Paid normally at the beginning to the appraisal company to confirm the fair market value of the home.
- Title insurance: Protects the buyer and lender in case issues with the title arise.
- Escrow fees: Paid to the party that handles the funds and documents between buyers and sellers. Escrow is comprised of taxes and insurance for the property and is normally added together with the principal and interest to make your monthly mortgage payment.
VA Loans
VA (Veterans Affairs) loans offer significant benefits, making homeownership more accessible to veterans and active military members. One of the standout features of VA loans is they require no down payment and often have lower closing costs compared to conventional loans. However, there are specific costs that buyers using VA loans should be aware of:
- VA funding fee: This fee varies depending on the amount of down payment and whether the buyer has used a VA loan before. It can be paid as a closing cost or be financed along with the mortgage. If you are a veteran and have a VA disability rating above 0%, the VA funding fee is waived.
- Other allowable fees: Buyers with VA loans can still expect to pay for the appraisal, credit report, state/local taxes, and recording fees, but they are protected from some of the additional fees (attorney fees, escrow fees and more) that might be imposed on conventional loan borrowers.
Approximating Closing Costs
Here’s a breakdown of estimated closing costs by loan type:
- Conventional Loan Costs: Generally, expect to pay around 2% to 5% of the home’s purchase price. For example, on a $400,000 home, closing costs could be between $8,000 and $20,000.
- VA Loan Costs: The costs can be slightly lower, primarily due to the VA funding fee that replaces both the down payment and private mortgage insurance. The exact percentage will depend on individual circumstances, but generally ranges from 2% to 4% of the loan amount.
Tips for Homebuyers
- Shop around: Compare lenders, as some may offer lower closing fees or better terms. Be sure to ask what lender fees (or Section A fees) you are being charged when you are quoted a rate.
- Negotiate: Ask the seller to cover part of the closing costs as part of the negotiation. Whether it’s a buyer’s or seller’s market seems to vary based on location so work with your realtor to come up with a gameplan. Word of caution: Avoid offering well over the asking price to receive seller concessions towards closing costs. This may put you in a situation where the property does not appraise to the value you agreed to purchase it.
- Budget wisely: Always budget for more than the estimated closing costs to cover unexpected expenses.
Understanding the intricacies of closing costs can save you time and money, making your homebuying process less stressful and more rewarding. Whether you're using a VA or a conventional loan, being well-informed will help you navigate the path to homeownership more smoothly. Consulting with a mortgage professional can provide personalized insights and guidance tailored to your unique situation.
Trident Home Loans (Equal Housing Lender, NMLS 65716) is an airline-industry leader for securing the right mortgage for you. Contact Spencer Wartman (NMLS 2109932) at [email protected] to let him help you secure your future home! And please reach out to Spencer directly if there’s a topic you’d like for him to address.
Trident Home Loans, NMLS ID 65716, Corporate Office located at 6723 Plantation Rd, Pensacola, FL 32504.Any offers or advertisements for mortgage products on our website or other platforms are subject to conditional approval. The actual terms and conditions of a mortgage loan, including interest rates, loan amounts, and eligibility, are dependent upon several factors, including the borrower's creditworthiness. Trident Home Loans reserves the right to modify or revoke any offer, and final approval is contingent upon the completion of a full application, verification of information provided, and meeting all underwriting requirements. For information regarding our licensing, you can visit our website at www.Tridenthomeloans.com.Trident Home Loans is an Equal Housing Lender. Please note that this disclaimer is provided for informational purposes and may be subject to updates or changes in accordance with regulatory requirements. Borrowers are encouraged to contact Trident Home Loans directly for the most up-to-date and accurate information regarding mortgage products and offerings. This advertisement is not an offer to lend, and all applications are subject to credit approval. Terms and conditions may apply.
