Woodbridge, Virginia First Time Home Buyer emailed and asked, "What are closing costs and who pays them?"
The closing costs are all the costs or fees associated with purchasing a home.
Below is a video and written breakdown of the closing costs from the Good Faith Estimate when purchasing your home with mortgage financing.
First are the Lender Fees to originate the loan. This includes points, underwriting, processing, loan application, or rate lock commitment fees. These charges are listed here in Box A of the Good Faith Estimate
(You can click an image for an example)
The Box A figures are the only costs I control directly as Your Woodbridge Mortgage Lender.
The other charges required to close the loan include: appraisal fees, credit reports, flood cerifications, and Mortgage Insurance Premiums (which is a financed amount on FHA Loans).
Escrow Accounts and Prepaid Items
Escrows are accounts set up with your mortgage to pay your taxes and homeowners insurance when they become due. The amount of money set aside in these accounts depends on when you close. Most taxes are due semiannually, so if you close in March your taxes will still be due in June. So we adjust the number of months we collect based on this date (don't worry you won't overpay on taxes this way because you will get a seller credit for the months they owned the property). We also place a couple of months of homeowners insurance reserves in this account. Homeowners Insurance is paid yearly on the anniversary of your closing, since you pay for one year's coverage in advance through the closing costs or upfront. I prefer including the insurance in the closing costs at settlement. the actual number may be different then your initial Good Faith Estimate depending on what company you choose to write your policy.
Another pre-paid item that varies is the days of interest collected at closing. If you close on the 28th of a month with 31 days, we will collect 4 days of interest at closing, many buyers like to settle at the end of the month to cut down this cost.
As a sidenote: Your first mortgage payment is due 30 days from the last day of the month you close. If you were to close March 28th, interest would be collected until the 31st at closing. Your first mortgage payment would be due May 1st. Because mortgages are paid in arrears it's like having a free month(you don't, but it seems like it). You pay the interest for the month you live in the home the following month. So May's payment is for April's interest and so on...
The title company or attorney selected to perform your loan closing has their own fees to include: settlement/closing fee, title search, document preparation, and wire fees. The title charges also include owner's and lender's title insurance. Lender's title insurance is a requirement for closing, where as the owner's coverage is optional, but I highly recommend every buyer have coverage, even if it makes your closing costs slightly higher. Owners coverage is what I call your peace of mind insurance...more on this later
Government Recording and Transfer Taxes
There is a cost to record your new Note and Deed at the county courthouse. Of course since "Uncle Sam" is involved with the tax amounts, the transfer taxes vary by county in most states.
Surveys, termite reports, realtor admin fees, and home warranty costs will be found in this category.
Are you amazed that 80% of the fees associated with closing costs are not from the lender? So when shopping for a lender make sure you are comparing apples to apples or Box A to Box A! ...Subscribe to my blog to read Part II, "Who is Responsible for Paying the Closing Costs?"