Closing Costs On Home Purchase And Refinance Transactions

by Gustan Cho

This Article Is About Understanding Closing Costs On Home Purchase And Refinance Transactions

All home purchase and refinance mortgage transactions have closing costs. Closing fees and costs are any costs and charges that the borrower incurs during the home purchase and/or refinance transactions. Closing fees and costs include costs that are a lender’s charges and/or other charges from a third-party vendor such as an appraiser, home inspectors, real estate attorneys, and other third-party professionals used and charged during the home buying process. In this blog, we will mainly concentrate and focus on closing fees and costs associated with a home purchase transaction. There is no set percentage of how much closing fees and costs are.

How Much Money Do I Need To Buy A House?

On a home purchase, there are the down payment and closing fees and costs that are required to purchase a home. The down payment is a fixed percentage of the home purchase price. For example, HUD requires a 3.5% down payment on a home purchase FHA loan. The 3.5% down payment is based on the home purchase price.

How Much Money For Down Payment Do I Need On Conventional Loans

Fannie Mae and Freddie Mac require a 3% down payment on a home purchase conventional loan on a first-time homebuyer. Fannie Mae and Freddie Mac require a 5% down payment for a homebuyer who is not a first-time homebuyer. You see that this loan program has a set down payment requirement based on a percentage of the home’s purchase price. This is how a down payment on a home purchase works. However, closing fees and costs are different based on many factors. We will discuss examples of closing fees and costs and how most home buyers pay for their closing fees and costs with a seller’s concession. We will cover closing fees and costs on refinancing mortgages in the next paragraph.

Understanding Closing Fees And Costs On Refinance Mortgage Transactions

Closing Fees And Costs On Refinance Mortgage Transactions

Refinance closing fees and costs are similar to home purchase closing fees and costs. On refinances, the homeowner does not have to come up with closing fees and costs outside of their pocket. Closing fees costs can be rolled to the back of the loan balance. Or the lender will give a lender credit for closing fees and costs in lieu of a higher mortgage rate.

Difference Closing Fees and Costs Versus Down Payment

There are two types of costs involved when you purchase a home.

  • The down payment on a home purchase is a fixed percentage
  • All home purchase transactions have closing fees and costs

The down payment is a fixed percentage of a home’s purchase price. The down payment you put on a home purchase is the equity you are investing in your home. The larger the down payment you put down, the more equity you have. Closing fees and costs are expenses involved in buying your home. Any costs and/or fees charged by the lender and/or other third-party vendors that go towards the purchase and getting a home loan approval is considered closing fees and costs. All mortgage borrowers will get a rough estimate of closing fees and costs listed on the Loan Estimate the loan officer prepares. The down payment is an exact figure from day one.

How Much Do Homebuyers Need To Pay For Closing Fees And Costs

Homebuyers Need To Pay For Closing Fees And Costs

However, closing fees and costs vary depending on the borrower, the location of the property, and other factors.

Most loan officers will over disclose closing fees and costs. This is because if the loan officer under discloses closing fees and costs by more than 5.0% of the actual costs, the loan officer is liable for the difference. Understanding closing costs is important during the homebuying process. Most of our borrowers at Capital Lending Network, Inc. do not have to pay closing fees and costs out of their own pockets.

Seller Concessions Explained

Getting a seller’s concession is key in not paying closing fees and costs. Homebuyers can cover most and/or all of their closing fees and costs with a seller’s concession. If they are short with covering all of the closing fees and costs with a seller’s concession, the borrower can get a lender credit. Lender credit are closing fees and cost credits lenders can offer borrowers short of closing fees and costs in lieu of a higher mortgage rate. Lender credit can only be used for closing fees and costs and NOT for any down payment.  Most loan officers can structure the deal where borrowers do not have to come up with any closing fees and costs. Closing fees and costs can be covered with a seller’s concession and/or lender credit.

How Sellers Concession Work In Covering Closing Fees And Costs

Every real estate transaction can have different closing fees and costs. The down payment is a fixed percentage of the home’s purchase price. However, closing fees and costs are different depending on the area, property type, loan amount, manual versus AUS, debt to income ratios, and other factors.

How Much Are Closing Fees And Costs On Home Purchase Transactions?

Closing fees and costs can range anywhere between 2% to 6% of the home purchase. You cannot have leftover sellers’ concessions. Any leftover seller’s concession needs to go back to the seller. However, most experienced loan officers will use every dime of a seller’s concession on closing fees and costs. Worst case scenario, loan officers will pay for discount points to buy down the mortgage rates with overages in sellers concession.

How Much Seller Concessions For Closing Fees And Costs Can Sellers Contribute?

Closing Costs Can Buyers Get As Seller's Concession

The amount of sellers concession homebuyers are allowed to get from home sellers depends on the home mortgage program. Here are the maximum seller’s concession agency mortgage guidelines allow:

  • HUD, the parent of FHA, allows up to a 6% seller’s concession on FHA loans.
  • The Veterans Administration (VA) allows up to a 4% seller’s concession on VA loans.
  • USDA will allow up to a 6.0% seller’s concession on USDA loans.
  • Fannie Mae and Freddie Mac will allow up to a 3% seller’s concession on owner-occupant homes and a 2% seller’s concession on investment home financing.

Non-QM loans depend on the wholesale mortgage lender. Some non-QM lenders allow up to 10% in seller’s concession for buyers to cover fees and costs.

What Charges Are Homebuyers Responsible To Pay For

Any costs and/or fees that are charged by lenders and/or third-party vendors in the origination and funding of a purchase and/or refinance loan transaction are called closing fees and costs. Costs to close can include origination charges, pre-paid, pre-paid interest, mortgage insurance, one year homeowner’s insurance premium, discount points, home inspection fees, appraisal fees, title search fees, title charges, transfer stamps, recording fees, credit report fees, attorney’s costs, flood certification, and any other costs and/or fees the borrower can encounter during the homebuying and mortgage process.

Use Seller Concessions And Lender Credit To Pay For Closing Fees 

Most of our borrowers at Capital Lending Network, Inc. normally do not have to pay closing costs out of their own pockets. Our loan officers will structure closing fees to be paid for with the seller’s concession and/or lender credit or a combination of both. For any questions about the content of this blog and/or other mortgage-related topics, please contact us at Capital Lending Network, Inc. at 262-716-8151 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Capital Lending Network, Inc. is available 7 days a week, evenings, weekends, and holidays.

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2 comments

John Smith December 23, 2020 - 12:26 am

I need a rehab loan.
Purchase 24000
Rehab 46000
ARV 110000
Ltv 63%
SFH
Advanced draws preferred with documented quotes

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Gustan Cho December 23, 2020 - 4:55 pm

I will have my Associate Michelle McCue to call you shortly.

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