What Are Closing Costs?

In most real estate transactions, people are very aware of what they are being charged and have made some preparations for those moneys that are coming out.  For example, sellers fully understand that they will have to pay off their mortgage and any other liens on the property.  There is almost always some commission paid to both the real estate broker representing the buyer and commission that is paid to the broker representing person buying the home.  Closing costs, on the other hand are usually a black box of charges that pop up a day or so before the closing on the property. We will seek to enlighten you on what some of those “black box” charges are.  Lets get into explaining what are closing costs.

So What Exactly Are Closing Costs?

Closing costs can be defined as all charges paid out and allocated at closing.  The charges we will attempt to define here are not the standard charges paid by both the buyer and the seller---but the “other” charges you may see on your settlement statement.  Here is a quick list of potential closing costs you may notice applied to either or both sides of the real estate transaction.

• -Fee for running credit report – this is simply the charge for running the home buyers credit --- charged by the lending institution and paid out of closing
• Abstract or Title Search – It takes time to send someone to the courthouse and review the title information on a particular piece of property.  These are the costs incurred and may be allocated to the buyer, seller or both.
• Title Examination – this is the fee for having someone (usually not the person who retrieves the documents from the courthouse, in many instances an attorney) to review the Abstract – and verify everything is hunky dory for closing.
• Closing Fee – this is simply the charge for the physical Act of Sale
• -Lender Fees- these would be any costs that the lender charges to process the loan
• -Appraisal Fees – if the appraisal was not paid directly to the lender outside of closing, you may see this charge on your closing statement
• -Recording Fees – these are the fees incurred that include recording your new Cash Sale or Conveyance in the local Clerk of Court
• -Lenders Insurance- the lender will require a lenders title policy.  This insures that the title is clear and if there is ever a challenge to the validity of the title, the legal costs would be covered by the respective insurance company. 
• -Owner's Title Policy– this is very similar to the Lenders Insurance, but covers the real estate buyer.  We have written an article going into much more detail on Do You Need Title Insurance.
• Lender Inspection Fee – If your lender requires an inspection of the property, such as for a VA type of loan, you will see those charges here
• Flood Determination Fee – this is a fee that is accrued for verifying the flood zone of the property
• Flood Cert Fee – this is the fee for creating the certification for what the flood zone is.
• Lender Inspection Fee – If your lender requires an inspection of the property, such as for a VA type of loan, you will see those charges here
• Recording Fees – These are the fees charged for the actual recording of the transaction

On your Settlement Statement, you will also see other charges that you were more familiar with such as:

• Loan Origination Fee – this would be the direct charges to the lender for originating the loan
• Loan Discount Fee – this would be the charge to “buy down” your interest rate
• Commission – this is the commission paid to both the selling and listing broker.  States handle this in different ways so we wont go into too much detail here
• Reserves Deposited with the Lender – These are monies that some lenders may require, for certain loans, which they require additional months of insurance (hazard, flood, taxes, assessments etc)
• Home Warranty – If a home warranty was provided in the real estate sale and not payed “outside of closing” – this is the cost of the warranty.  The closing company will usually take those funds and submit them to the warranty company on your behalf.  You may need some additional “stuff” done to fully implement your warranty.  Refer to your real estate agent for details.
• Your lender is now required to provide the purchaser with a Loan Estimate within 3 days of a completed loan application. There are many new rules that have been recently implemented that dramatically affect how real estate closings take place and the processes that the closing companies must follow.  More on that topic another day.

 On average, you can expect all closing costs to be 2-5% of the purchase price. Please keep in mind this is just an estimate. Costs will vary depending on a variety of factors and the lender is permitted to adjust these costs.

In no way are we acting as an attorney or giving full definitions of the Settlement Statement.  This is simply to help define some of the more common charges that you may see when buying or selling a home.

Click for a full list of real estate financial terms.

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