Buying a home is an exciting journey. Being shocked by the amount of out-of-pocket expenses at closing is not.
How much in fees should you expect when buying a house?
You can expect to pay one to two percent of the purchase price in closing costs. However, much of the fees are prepaid interest, taxes, and insurance for your escrow account.
This article explains each closing cost in the home buying process to help you understand which fees to expect, if it’s a negotiable fee, and even better, an avoidable one.
When you’re finished reading, use the closing cost calculator to see an estimate based on your down payment and expected purchase price.
- Lender fees
- Escrow and title fees
- Realtor® and transaction fee
- Out of pocket expenses
- Prepaid and prorated costs
- Closing cost calculator
Any regulations and laws cited pertain to the laws of Nevada and contracts by the Greater Las Vegas Association of REALTORS®. Please check with a specialist in your area prior to acting on information we share.
All estimates provided are based off a sales price of $500,000 in Clark County, Nevada.
Loan origination fee
What’s a loan origination fee?
The loan origination fee should be your most expensive closing cost when buying a home. That’s why it’s important to discuss both the rate and the origination fee when shopping for a lender.
Some lenders may split the fee between processing and underwriting fees. You are most likely to receive a quote as a percent of the loan amount.
How much is the origination fee?
Origination fees can range depending on the lending company. Usually, that range is between 0.5% to 1.0% of the loan amount.
On a $400,000 loan, that would equal $2,000 to $4,000.
The good news is, there won’t be any hidden fees. At the beginning of the lending process, your lender will provide you with a loan estimate.
This estimate will show the origination fee and any other fees that may be charged.
Are you a Veteran using a VA loan? You might pay a VA Funding Fee.
Military veterans may benefit from using a VA loan. A VA loan allows you to purchase with little to no down payment and is backed by the U.S. Government.
In 2021, and with no down payment, the VA funding fee is 2.3% of the loan amount. Increasing your down payment to 5% or 10% will decrease the funding fee.
Those exempt from paying the VA funding fee include:
- Veterans who receive compensation for service-connected disabilities
- Veterans who would receive disability compensation if they didn’t receive retirement pay
- Veterans rated as eligible to receive compensation based on a pre-discharge exam or review.
- Veterans who can but are not receiving compensation because they’re on active duty
- Purple Heart recipients
- Surviving spouses who are eligible for a VA loan
Since the funding fee can be added to the loan, it’s not an out-of-pocket expense when buying a home, but still a necessary cost to know.
Escrow, title and county fees.
Congratulations! Your offer was accepted, and escrow is being opened. But who, or what, is escrow?
The escrow officers and title companies play an essential role in the process. As a neutral third party, the title companies job includes the following:
- Providing documentation showing the title on the home is clear and insurable.
- Be a neutral party that helps each side through the transaction by following the purchase agreement terms.
- Handle the collection and disbursement of funds, like the earnest money deposit, down payment, and loan.
- Sign loan documents and deeds.
- Send to the county to officially record.
Escrow Fee: $462
Typically split 50/50 between the buyer and seller. The escrow fee is a payment to the escrow company for its services.
Recording fee: $129
Your home purchase is officially complete when the County Recorder’s office records and publishes the deed as sold.
Lender’s Title Policy: $1,949
Title insurance protects against a break in the chain of title or a claim on a title that was missed or not filed before closing.
The lender requires a lender’s title policy to protect the loan against future title disputes and property ownership claims.
For example, a collection agency owed money by the previous owners you purchased from decides they should have a right to collect from the property sale.
Or, the previous owners were involved in an ugly divorce, and one party believes they should have received more money and now wants the rights to your home.
Agent and transaction fee.
REALTOR® commission: 0%-3%
Traditionally, real estate commissions are paid by the seller. However, commissions are negotiable. While rare, there are extraordinary circumstances that may change this.
For instance, If you fell in love with a home being sold for sale by the owner, your agent may require a commission for their continued service.
Some agents use a document called the Buyer’s Brokerage Agreement. It’s a contract guaranteeing you will work with them, and they are entitled to an agreed-upon commission percent when you purchase.
If you agree and sign that your agent will receive a 3% commission on your purchase, and the home you love is paying 2%, you may be responsible for the 1% difference. That could be $5,000 on a $500,000 home.
If your agent presents you with a Buyer’s Brokerage Agreement, read the entire contract. You are not required to sign; however, you may need to find a new agent if they require it.
Transaction or filing fee: $550 average
The actual name may be disguised as many things. A transaction fee is standard terminology.
Traditionally, a Realtor would split their commission with the brokerage. Now, many brokers offer agents one hundred percent of their commission.
Brokerages charge a transaction or filing fee to the agent, passing it along to the customer.
This is not a mandatory fee, and you should ask your agent to pay it.
Fees to expect outside of closing.
Not all fees will be paid at closing. Appraisers and home inspectors will need to receive payment upfront.
Appraisal: $450-$650
When financing a home purchase, your lender will require an appraisal to be completed on the home. Appraisals protect the mortgage company from lending more than the home’s value.
Licensed appraisers use public data from the assessors and Multiple Listing Service (MLS) to compare recently closed sales nearby and determine the property’s value.
Appraisers visit the property to note the upgrades and take measurements to verify the square footage. The appraiser then adjusts the comparable sales by adding or subtracting value for the differences in square footage, bedrooms, garage spaces, lot size, upgrades, views, location, etc.
Inspection: $350-$500
Once you have an accepted offer, you start your due diligence. During your due diligence period, you have the opportunity to vet the home after the contract is accepted.
The typical time for a due diligence period is the first 8 to 12 calendar days. Day one starts the day after offer acceptance.
You should use the due diligence period to hire a licensed inspector to perform a non-invasive and non-destructive physical inspection of the home. Their job is to find any mechanical issues that may impact its usability or suitability.
The inspector then prepares a detailed report for you to review. Details of all features inspected will be noted with any issues highlighted.
Based on this report, and if no significant damage is discovered to convince you not to buy, you can request the seller to make repairs or credit you at closing.
Prepaid expenses, prorated costs, and miscellaneous items.
Prepaid costs: $1,200 to $2,000
The majority of a mortgage payment goes towards interest and principal. The balance is placed in an escrow account.
Your mortgage servicer will use the funds in the escrow account to pay property taxes, insurance, and payment protection insurance, if applicable.
The second most significant part of your closing costs will be prepaying into your escrow account—usually, four to six months of homeowner’s insurance and property taxes.
Prorations and Adjustments: $0 to $100s
Quarterly property taxes, sewer, trash, HOA, and sub-HOA bills are paid in advance. This means the seller has likely already made payment for the time after it’s sold to you.
For easy math, if the seller paid $1,000 in quarterly expenses and you close halfway through the quarter, $500 will be collected from you and refunded to the seller for the time they no longer own the home.
Additional Costs: $1,000+
While not a guarantee, there are usually some additional costs—for example, your first HOA, trash payment, and annual insurance premium.
Most closing cost estimates also have a “pad” of a few hundred dollars. This covers small miscellaneous items like deed recording ($42) or notary ($150) if you should need one.
In conclusion.
Closing costs aren’t scary. As you’ve now read, out-of-pocket expenses when buying a home are primarily prepaid costs.
We advise focusing on the fee you have the most control over, the loan origination fee.
Mortgage loans can be creatively shaped and sculpted to fit most scenarios. A $0 loan origination probably has a rate that’s .125% to .25% higher to make up for it.
Some advertisements for the lowest rate guaranteed may have a higher origination fee. This is why it’s always essential to shop around.
In mortgage lending, there are mortgage brokers and lenders. For instance, Wells Fargo or Quicken loans underwrite their loans; for this reason, they will quote only their rate and costs.
A broker is a middle man, so they can request quotes from several lenders and compare the best scenario. Your bank may also offer deals based on your relationship. However, large banking institutions’ lending standards can be more stringent and their process slower.
You’ll be paying your mortgage monthly for a long time. Take the extra steps to explore your options.
Happy house hunting.
Closing cost calculator
Enter your estimated sales price, remaining mortgage balance and commission %.
