What are closing costs?  An Explanation for Northern Virginia homebuyers 

Buyers purchasing a home for the first time need to be aware of closing costs involved with the purchase.  In Virginia, closing costs and pre-paid items fall into several categories and generally run about 2-3% of the sales price.  Therefore, a purchaser buying a $300,000 condo in Alexandria should expect to pay between $6000 and $9000 in closing costs, whereas someone buying a $700,000 single family home in Vienna may pay around $15,000 to $21,000 in closing costs.

The current real estate market in Northern Virginia is still leaning towards a buyer's market, thus affording buyers the opportunity to ask for the sellers to contribute payment towards their closing costs.  In many cases, ASK AND YE SHALL RECEIVE!  Some more motivated sellers are even offering up closing costs from the get-go by stating it right in the listing remarks.  Even if not declared upfront, I often advise sellers that in the current market they should be prepared to pay at least some of the purchaser closing costs and weigh that into the equation of their net proceeds from the sale.

Here's a breakdown of purchaser's closing costs in Virginia:

Lender's Fees

The first category of closing costs comprises the lender's fees.  These vary from lender to lender and depend on whether you are using a mortgage lender or a mortgage broker.

Loan Origination Fee:  This a fee that some lenders will charge to cover their administrative costs.  It is often about 1% of the loan amount.

Discount Points:  This is a one-time fee paid to the lender to lower the interest rate on the loan.  A point equals 1% of the loan amount.  Each point will subsequently lower your interest rate by a certain amount and thus reduce your mortgage monthly payment.

Appraisal:  Every lender requires an appraisal to be completed on a home.  While an appraisal contingency can be waived as part of the contract, an appraisal itself must be completed.  The appraisals average about $350.

Credit Report:  Lenders will run a credit report to determine the credit risk of the borrowers and use this in the decisionmaking process of approving the loan and its terms.  Average fee for the credit report in Virginia is $55.

Miscellaneous Lender Fees:  This can be a gray area.  Fees may range from $450-$1000.  Make sure to ask the lender what these fees cover.  Sometimes these can be junk fees which are nothing else but a profit center for some lenders or mortgage brokers. 

Items Required by Lender to Be Paid in Advance

Advance Interest:  Lenders will require the buyer to pay interest from the date of settlement to the 1st of the next month.  The closer to the end of the month, the smaller this fee.  The other nice thing about settling at the end of a month is that the buyer's first mortgage payment won't be for an additional month.  For example, with a settlement on June 28th, a buyer would pay 2 days of interest, and then the next mortgage payment would not be until August 1st.

Mortgage Insurance Premium:  This a premium paid if the buyer buys a property with less than 20% down.  However very few buyers in Virginia today need mortgage insurance premium because lenders offer options like 80/20, 80/10/10 loans, which are basically two piggyback loans that will bypass mortgage insurance.

Hazard Insurance:  Protects the buyer and lender against losses due to natural hazards, such as wind, fire, storm, etc.  The cost for the first year premium is approximately $2.50 per $1000 of sales price.

Reserves Deposited with Lender

In addition to paying certain items in advance, in Virginia, most lenders will require purchasers to set up an escrow account to pay taxes and insurance.  These are initiated at settlement by escrowing several months of insurance and tax.  Different lenders may have different requirements about how much must be put into escrow.

Hazard Insurance:  Usually 2 months is required to be placed in escrow. 

Mortgage Insurance:  If applicable, usually 2 months escrow is required.

Property Taxes:  Property taxes vary by jurisdiction and are typically paid twice a year.  A portion of a buyer's monthly mortgage payment goes into escrow for taxes to be paid out by the mortgage company to the local jurisdiction when the tax bill is received.  Most lenders require 3 months of property taxes to be escrowed at settlement.

Homeowner Association/Condo Association Fees:  Certain lenders will want this to be paid upfront at settlement.  The amount depends upon the particular homeowner or condo association.

Title & Recording Charges

In this category are the fees charged by the settlement company or closing attorney as well as the fees charged by the county or city for recording the deed and deed of trust.

Settlement Fee/Title Exam:  This fee can vary with different settlement companies but is typically between $250 and $350.

Title Abstract and Search:  This covers the service that the title company performs to make sure that there are no outstanding liens on the property.  Average cost of $150.

Title Insurance:  This protects the lender and the buyer from any future title claims.  Lender insurance is required and owner insurance is optional, but I recommend that all buyers purchase owner's title insurance.  Virginia owner's title insurance costs approximately $4.40 per $1,000 of sales price and is a one-time fee paid at settlement.

Recording Deed:  Costs $33 plus $3.34 per $1000 of sales price.

Recording Deed of Trust:  Costs $46 plus $3.34 per $1000 of sales price.

There may be additional costs to record a power of attorney if that is used in a settlement.

Additional Settlement Charges

Survey:  A survey is required on a townhouse or single family home, but not on a condo.  Cost is usually $200-$300.

Pest Inspection:  Usually costs $30-$60.  Seller is responsible for remedying any wood-destroying insect problems.

Let's take a look at an example of two different purchases and what the closing costs would be:

It is vitally important to make sure that your lender gives you a Good Faith Estimate (GFE) of your closing costs upfront so that you have an idea of how much money you will need to purchase a home.

Feel free to contact me for my recommendations on good Virginia lenders and settlement companies.