Imagine that you have searched for a home for a few months and finally found one that meets everything on your wish list. You can picture yourself playing with your kids in the big back yard, entertaining in your newly updated kitchen/dining area and driving only 20 minutes to your new job. Everything seems to be moving along just as you planned—until you receive your Closing Disclosure Statement showing your final closing costs. It is 3 days before your
scheduled closing date and you learn that you owe $11,000 in closing costs, $5000 more than you expected. You are now scrambling to pull money together to ensure that you can close on your ideal home and meet the requirements of the contract you signed. I have heard these horror stories of surprise closing costs so my goal is to better prepare you for this stage so that you have a smooth home-buying experience.
Closing costs are the expenses associated with the final transaction of buying a home. These costs are in addition to your down payment and other expenses such as Real Estate Agent Commission fees. Lenders are required to give you a Loan Estimate, an approximation of closing costs, when you provide them with the following items:
1. Your name
2. Income
3. Social Security Number (they will run a credit report)
4. Address of the type of home you would like to buy (needed to estimate taxes and insurance)
5. Estimated value of the property
6. Desired loan amount (Estimate your target in Step 5 of the Confident Home Buyer Tool Kit)
Confident Home Buyer Tool Kit Tips:
Closing costs can range anywhere from 2–5% of the price of the home. As a result, you can expect to pay between $4000 and $10,000 in closing costs on a home worth $200,000. See the Closing Costs table for more information.
In addition to the closing costs in the bullet above, there are more expenses that you may incur if a seller does not agree to help you. Using the Additional Expenses table below as a reference, you could potentially have to pay an additional $10,000 in expenses if the seller doesn’t contribute.
Take the time to plug these estimates into the “Savings Needed for Homeownership” section of Step 3: Understand Your Finances in the Confident Home Buyer Tool Kit and run a few scenarios so you can plan and budget accordingly.
Although not a requirement, sharing more information with the lender will mean a more accurate Loan Estimate. Providing verifying documents (W-2, bank statements, etc.) and details of any debt you may have, will reduce the chances that you will be surprised with higher closing costs. Sharing this information does not mean that you must use that lender. In fact, it is recommended that you get at least 3 estimates and compare costs to ensure that you get the best terms.
In addition to the Loan Estimate, the loan officer will provide you with a Pre-Approval Letter, which you will use to prove that a lender is tentatively willing to finance your home purchase. These letters are typically good for 30–90 days. Sellers and their Real Estate Agents require the Pre-Approval Letter before accepting an offer on a home. If you are in a seller’s market, where homeowners are receiving multiple offers on a home, you will want to have a strong Pre-Approval Letter. When you provide your lender with as much information as possible to prove your ability to repay your loan, some loan officers may be willing to speak with the seller and their agent as well as provide you with a strong Pre-Approval Letter. This strategy can help move you to the top of the offer pile, getting you that much closer to purchasing your desired home.
Closing costs can range anywhere from 2–5% of the price of the home. As a result, you can expect to pay between $4000 and $10,000 in closing costs on a home worth $200,000. See the Closing Costs table below to get more familiar with the fees. Be aware that the table does not include your earnest money, down payment, or other expenses such as a home inspection and appraisal. Take a look at What’s the Right Amount for a Down Payment and Expenses You Will Pay Before Closing for additional guidance on these expenses.
Closing Costs
In addition to the closing costs in the example above, there are more expenses that you may incur if a seller does not agree to help you. For example, as in the Additional Expenses table below, the commission for your REALTOR® can be paid by the seller. The seller can also agree to an additional contribution to help with expenses*. But note, if you are interested in a home with multi-offers, you may not want to request these concessions in order improve the chances of your offer being accepted. Again, using the Additional Expenses table below as a reference, you could potentially have to pay an additional $10,000 in expenses if the seller doesn’t contribute. If you find yourself in this type of circumstance, and do not have the funds, there are options such as finding another home or working with the lender to see if some costs can be consolidated into the loan. Think about all possible scenarios now and decide how you would like to proceed so you are not rushed into a decision at closing.
Additional Expenses
As you can see, closing costs can be significant, especially when you add your down payment or the scenario of a seller choosing not to contribute to the expenses. Now that you have a better understanding of closing costs, take the time to plug these estimates into the “Savings Needed for Homeownership” section of Step 3: Understand Your Finances in the Confident Home Buyer Tool Kit and run a few scenarios so you can plan and budget accordingly.
*Be aware that lenders and loan types may limit the amount that a seller can contribute to the buyer so be sure you have clarity of these guidelines.
Denise Johnson, MBA, REALTOR®, is often referred to as a "Data Nerd" by family and friends and has a gift for seeing the important facts of a situation. She aims to fit all the pieces of the jigsaw puzzle together into a complete picture, making it easier for herself or anyone she counsels to make sound and rapid decisions.
After 10+ years of working for multiple Fortune 500 and 1000 companies across Logistics, Finance and Marketing, Denise made the leap into the Real Estate Industry hoping to help others achieve their homeownership desires. She can remember purchasing her first home at the age of 23, and it being both a time of joy and stress because she didn't fully understand the process and the implications of owning a home. Since then, she has owned and sold multiple personal properties, including selling an investment home that turned from a Rehab to a New Construction project in 2020. She has a desire to share all that she has learned and continues to learn with future customers to tip the scales towards a joyous homeownership and home-selling experience.
When she is not busy finding solutions in business, she loves large get-togethers with friends and family, international travel adventures with her hubby, and growing her passion for gardening and cooking healthy recipes.
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