Below are some common Home Financing Terms buyers will need to understand and negotiate during their home purchase. In a perfect world, each party pays for their own closing costs associated with the transfer of ownership from the seller to the buyer; however, many sellers do end up negotiating some costs based on lender or insurance requirements or market conditions.
On average, buyers’ closing costs range between two to five percent of the sales price. This includes only the costs to transfer ownership and fees required by the lender to be collected at closing. This does not include the down payment on the loan. Closing costs include things like prepaid interest, insurance premiums, surveys, etc. but do not include the costs of inspections. When you make an offer on a home in Tallahassee, part of the negotiations is the earnest money deposit that you will 'put down' as good faith toward buying the house. This is the buyer's money as long as they follow the contract and can be put towards closing costs and/or down payment (depending on the size of the deposit). If the buyer walks away from the house after the first two weeks (known as the inspection or contingency period, this deposit becomes the sellers. This money is held by a neutral third party who is contracted to transfer ownership from the seller to the buyer. Some fees or line items can be negotiated or shopped around other service providers. Please pay attention to your contract closely. You usually have a limited time to change your mind after signing the negotiated contract offer.
Except for maybe the appraisal fee, these costs are collected at closing by the title agent or attorney.
VA funding fee –
This is the fee charged by the Veteran’s Administration for processing the loan. It can be paid by the seller or the buyer or can be rolled into the loan. The amount varies based on details of the veterans’ mortgage history, their status, and their down payment.
Loan origination fee –
This is the fee charged by the lender for processing the massive amounts of paperwork needed to comply for bank and federal guidelines. Sometimes this fee is negotiable and is usually around one percent of the loan amount.
The bank needs a neutral third party to verify the value of the house, so they have you hire an appraiser. The fee, paid to a licensed appraiser, will be collected from you by the lender within a couple days of the executed contract (based on contract’s timeline).
Discount Points –
A point is one percent of the mortgage and these fees, paid at closing, are considered prepaid interest, and can be used to lower the interest rate and monthly payment.
Title Insurance –
Buyers are required to purchase an insurance policy that covers the lender’s risk for any liens left on the home (besides the mortgage) after closing. It does not cover the buyer’s loss or risk, just the lender. We recommend buyers order coverage for themselves as well.
Mortgage Insurance –
If the loan’s value is greater than 80% of the appraised price, the lender will require the buyer to purchase mortgage insurance to reduce the lender’s risk of loss due to buyer’s default on the mortgage. Some lenders automatically drop off the mortgage insurance when the loan drops below 80% of the value.
Recording Fees –
These are fees charged by the county or city government to transfer the ownership from the seller to the buyer. The mortgage and the deed are recorded by Clerk of Courts of the county where the home is located.
Survey Fee –
Required by title insurance (which is required by the lender), this is a fee paid to the surveyor to verify the property lines and identify any encumbrances and provide boundaries for title lien searches. At the final walk through the buyer should find the pink flags marking the corners of the property.
Underwriting Fee –
This is another fee collected from the buyer, paid by the lender to the company that verifies that the loan package meets federal and lender loan requirements.
Settlement Fee –
This is the amount paid to the closing agent, title agent, or attorney for collecting the information and transferring the ownership from the seller to the buyer.
A portion of each monthly mortgage payment will include an amount that is collected in an escrow account. The lender uses this account to pay insurance and taxes yearly.
Property Taxes –
Depending on the bank and loan requirements, two to three months of taxes will be collected at closing and held in an escrow account. The monthly mortgage payment will also include a portion for taxes. This should be enough for the lender to pay the taxes in full before the end of the year. Note here to the buyer. The seller will give you a credit for the portion of the pro-rated taxes that they owe for their time in the house. At the end of the year, you will be responsible for the entire tax bill. (It will be paid from escrow and buyer will not have to write a check for it.)
Property Insurance –
At closing, the annual premium will be collected by the title agent and sent to the insurance company. The lender will collect a monthly amount to add to the escrow account and pay the premium approximately 10-11 months after closing for the next year’s premium.
Possible Additional Closing Fees
Depending on the buyer’s situation, the location of the house, and/or the lenders requirements.
Flood Insurance –
If the house is in a flood zone, the lender will require flood insurance. This amount is collected monthly for the escrow account.
HOA Fee –
The homeowners association dues are sometimes paid in advance and prorated at closing so the seller does not pay for the buyer’s portion of the dues. Sometimes the HOA organization charges a fee to settle any accounts and transfer the voting information to the buyer after closing.
Owners Title Insurance –
This insurance policy covers the buyer from any liens on the property that were not discovered during the title search. This is not required, but highly recommended.
If a buyer is married and the mortgage is only in one person’s name, but the home will be occupied by both the husband and the wife, both names will go on the deed unless the non-purchasing spouse acknowledges that they will not be on the deed. Either way, both spouses sign at closing. Each side will receive an itemized closing statement to review from the closing agent before closing. These are the official and final numbers. You should see a similar estimate from your lender at least three days before closing that will include your monthly payment, loan terms, fees, and similar information. Review it closely and ask lots of questions if it is not clear. Check out our closing costs chart for more information!
The Consumer Financial Protection Bureau protects consumers from predatory lending practices. Check out their closing disclosure explainer here: https://www.consumerfinance.gov/owning-a-home/closing-disclosure/
Mortgages – The Power of Compound Interest
It is that time of the year when temperatures rise, and sellers start putting their homes on the market. Even though inventory is low – so are the interest rates! You can lock in rates now and most banks will honor a lower rate if the interest rates drops, however, if you lock the rate it will not increase! Pay attention to the expiration date!
The average sales price in Leon County is $215,000. Let us say the buyer puts down 20% on the loan and the mortgage is for $172,000. Here are the estimate costs and the total amount the buyer will pay for the mortgage over the life of the loan.
Some additional costs that *may* be added to your monthly payment and/or closing costs include:
Taxes, Insurance, HOA/COA Dues, Repairs, Renovations or maybe some Transfer Fees. Feel free to download our buyers pre-checklist HERE.