Closing Costs

Closing costs increase the funds you need to purchase an investment property. Focusing on the down payment alone isn’t enough. Because of closing costs and prepaid expenses, you could be on the hook for thousands more than expected to pay for a house. 

Working with your loan officer will help you estimate closing costs and know what to expect when buying an investment property.

What Are Closing Costs?

Closing costs are payments that occur when finalizing a real estate transaction, such as the sale or purchase of a house. Both homebuyers and sellers pay closing costs. 

But who pays closing costs and how much average closing costs are varies. Closing costs are due when you sign documents transferring property ownership. You usually make the payment using a wire transfer or cashier’s check.

A home loan amount, a property’s location, and a homebuyer’s credit score are some of the factors determining closing costs. Some state laws require professional services that increase a transaction’s closing costs.

Many closing costs are negotiable between homebuyers, sellers, and mortgage lenders. If you’re buying property, it’s crucial to research and shop home loans before choosing a lender.

Many mortgage lenders require an escrow account, where some of the closing costs will be deposited. This money covers some of your expected property taxes and mortgage payments. 

The amount your lender requires varies, but it’s often two months of your homeowners insurance premiums and property tax payments.

How Much Are Closing Costs?

On average, closing costs in homebuying account for 2% to 6% of a property’s purchase price. 

Keep in mind that the down payment is separate from closing costs. The down payment is your investment in the property, which is usually 20% or more of the home’s purchase price for investment properties.

Closing costs are the fees you pay the lender, title company, appraiser, and other third parties to process and close the loan. You can usually negotiate closing costs or negotiate them with lenders to get the most attractive and affordable loan terms.

Who Pays Closing Costs?

Buyers and sellers pay closing costs, but buyers pay most of them. Buyers pay closing costs to cover all lender costs and third-party fees for services that work with the lender and include: 

• Appraisal fees
• Credit report fees
• Loan origination fees
• Courier fees
• Recording fee
• Closing fee

Sellers have their fair share of costs, including:

• Real estate agent commissions
• Title insurance costs (for the lender’s policy)
• Taxes and fees

Sellers can also offer to cover closing costs. This is called seller’s concessions. Each loan program has different limits, but conventional loans are the main option for investment property purchases.

The amount sellers can contribute on conventional loans varies from 3% to 9% and varies by down payment amount. If you put down less than 10%, sellers can cover up to 3% of the sales price in closing costs; 10% to 24.99% down payment and sellers can cover 6% of the sales price in closing costs, and 25% or higher down, sellers can provide up to 9% of the sales price to cover closing costs.

Typical Closing Costs for Buyers

Each real estate deal is different, but there are typical closing costs that homebuyers can expect. 

Here is an alphabetical listing of these expected costs.

Application fee

Before applying for a mortgage, ask your lender if there’s an application fee. If so, make sure you understand what it covers. 

Sometimes, application fees are negotiable, but you might need leverage in your negotiations. That’s why shopping around and knowing what other lenders ask for an application fee is essential.

Appraisal

In most deals, you must pay an appraisal fee to a professional appraiser to assess the property’s fair market value. The appraisal tells lenders the home’s fair market value and is used to determine how much you can borrow and the rates and fees they will charge.

Association dues

If you’re buying a property included in a homeowners or condo association, you may have to pay your annual dues at closing. The buyer and seller can split this cost.

For example, you might owe a prorated amount of your association’s annual dues if you buy a property partway through the year.

Attorney fees

Some states require lawyers to review a real estate transaction’s closing documents. If so, both the buyer and seller have legal representation, and attorney fees usually apply. 

The fees vary by location and service. Some attorneys charge by the hour, while others charge a flat fee.

Courier fee

Sometimes your lender will use a courier to deliver the documents required to close a deal. Doing so can expedite finalizing the transaction, but you may pay a courier or postage fee as a result.

Credit report fee

Your mortgage lender will run a tri-merge credit report and charge a fee to cover the cost of those reports. The reports retrieve your credit score and history from the three major credit bureaus. Lenders use this information to determine what loan program and loan amount they can offer.

Discount points

These “points” represent money you pay your lender at closing to receive a lower interest rate. One discount point equals 1% of your home loan amount, in exchange for dropping your interest rate by 25%. 

For example, you pay your lender $1,000 in points for a $100,000 mortgage loan. They may then reduce your 4% interest rate to 3.75%.

Escrow deposit

Many lenders require you to have an escrow account for your expected property taxes and homeowner’s insurance premiums. Your lender makes your insurance and tax payments for you using the money you deposited into your escrow account at closing.

Escrow fee

If you’re required to set up an escrow account, a title company, escrow company, or a lawyer will manage the process. They’ll charge a fee for doing so. 

Often, homebuyers and sellers agree to split this cost. Still, you must make monthly escrow payments to have enough funds to cover your real estate taxes and homeowners insurance premiums.

Flood hazard determination fee

The U.S. government requires a flood risk assessment for all real estate transactions. A third party handles the evaluation, and they’ll charge you a fee for their service. You’ll have to pay for flood insurance if they determine your property is in a flood zone.

Home inspection

Lenders don’t require it, but having a professional inspection on a property before purchasing it makes sense. 

A home inspector looks at the entire home, its systems, and any potential problems, providing you with a detailed report. If the home has serious issues, you can use the report to negotiate with the seller, or in the worst-case scenario, cancel the purchase.

Homeowners insurance

Homeowners insurance is usually not required by law—but most lenders require it. Plus, it’s a good idea to have it in case of damage to the property. You’ll usually pay your first year’s insurance premium at closing.

Lender’s title insurance

Your mortgage lender often requires you to pay for insurance protecting the lender in case there’s an issue with your property’s title. This is one of those closing costs that may be seller or buyer paid, depending on your state laws. 

Some states require sellers and others require buyers to pay it. However, sellers can help with seller concessions if you negotiate it into the contract.

Lead-based paint inspection

Most states don’t require an assessment of a single-family home’s lead-based paint risk. Some locations require it when buying properties with multiple units, such as apartment buildings. 

Even if you’re not obligated to do so, you should pay for a lead-based paint inspection if you’re buying a property built before 1978. Doing so can save you money in future remediation costs. And ensuring a healthy home environment is the right thing to do for your tenants.

Mortgage broker fee

You might hire a mortgage broker to help you find a mortgage loan. If so, they’ll charge you a commission based on the percentage of your loan amount. This cost is usually between 0.5% and 2.75% of the property’s purchase price.

Owner’s title insurance

Owner’s title insurance covers you in case someone challenges your property’s title after you take ownership. A single payment at closing pays the insurance premium for the time you own the home. Often, the seller agrees to pay this fee for buyers.

Origination fee

Most lenders charge an origination fee when processing your home loan application—usually 1% of your loan amount. However, not all lenders charge an origination fee, so it’s essential to research different mortgage lenders to determine your options. 

Sometimes an origination fee is a lump sum of most of the lender fees. Ask for a specific breakdown so you can understand the loan’s true cost.

Pest inspection fee

Some states require homebuyers to pay for a termite inspection. Even if you’re not required to do so, you may want to pay for a pest inspection to ensure you’re not buying a damaged or infested property.

Prepaid interest charges

Most mortgage lenders require you to pay interest upfront for your mortgage loan. This cost covers your loan’s interest between your closing date and your first mortgage payment. The closer you close to the end of the month, the fewer interest charges you’ll owe.

Private mortgage insurance (PMI)

Lenders usually require you to carry private mortgage insurance (PMI) if your down payment is less than 20% of your home loan amount. PMI covers your lender if you miss a mortgage payment. Lenders have varying PMI costs, but usually range from 0.5% to 2.3% of your loan amount. 

There are four ways to pay for your private mortgage insurance premiums:

• Upfront: This is also called a single premium, meaning you pay the entire cost of your PMI at closing. Doing so keeps you from dealing with monthly PMI payments. However, you’ll need more money at closing, and you won’t receive your PMI funds back if you refinance your loan.
• Split: This option is when you pay part of your PMI costs upfront. Your lender folds the remaining balance into your monthly mortgage payment.
• Monthly: You pay nothing on your PMI at closing. Your lender adds your entire PMI balance to your monthly mortgage payment.
• Lender-paid: Your mortgage lender covers your PMI costs in exchange for raising your interest rate. This method can save you money at closing but cost you more over the long term.

Property taxes

You’ll typically owe taxes for the property you’re buying from your closing date until the end of the tax year. You’ll owe a prorated amount if the seller already paid that year’s property taxes. 

If the seller hasn’t paid that year’s property taxes, they’ll often credit the homebuyer for the number of days the seller owned the home. Doing so reduces the amount of property taxes the buyer owes at closing.

Recording fees

Your local government requires a copy of your title before they recognize you as the property’s legal owner. Your title company usually handles this transaction, but they’ll charge you a fee for that service.

Survey fee

This fee covers hiring a professional surveyor to verify the borders of the property you’re buying. The survey informs buyers of any property restrictions or conditions, such as easements or encroachments, that could affect their decision to buy the property.

Tax service fee

Most mortgage lenders require homebuyers to pay for a third party to ensure the taxes are current on a property. The amount of tax service fees varies, and buyers typically pay the cost. However, tax service fees may be negotiable with your lender.

Title search fee

Before buying a property, you need to verify its ownership. A title company handles this process, ensuring no one else can claim the property after you purchase it. 

The company charges a fee for their service. While the amount varies by location and property, title search fees tend to range from $200 to $1,000.

Underwriting fee

Some mortgage lenders charge an underwriting fee to pay for reviewing your home loan application. If a lender charges this fee, they usually don’t also charge an origination fee. Your loan estimate will contain a detailed breakdown of the fees so you can understand the total cost of the mortgage loan.

Typical Closing Costs for Sellers

Each real estate deal is different, but there are some closing costs that sellers can anticipate. 

Here is an alphabetical listing of these expected costs.

Association dues

If you’re selling a property in a condo or homeowners association, you may owe dues to the association. If so, you’ll likely need to make your property’s dues current at or before closing.

Association transfer fees

If selling a property included in a condo or homeowners association, your association may require you to pay a fee to transfer ownership to the buyer. This varies by HOA, so check with the association before selling the property to understand the fees.

Attorney fees

Some states require lawyers to review a real estate transaction’s closing documents. If so, both the buyer and seller have legal representation, and attorney fees usually apply.

Escrow fee

A buyer’s mortgage lender may require them to set up an escrow account. If so, a title company, escrow company, or a lawyer will manage the process. They’ll charge a fee for their service. Homebuyers and sellers often agree to split this cost.

Closing cost credits

These are credits you give the buyer to lower the property purchase price. You may extend closing cost credits to incentivize a transaction. 

For instance, a buyer may be hesitant to buy your property because it needs repairs. You can give them a credit, reducing the property’s cost, to cover some of that work.

Lender’s title insurance

The homebuyer’s mortgage lender may require insurance to protect them in case there’s an issue with your property’s title. Often, the buyer pays this cost, but in some cases, the seller does.

Owner’s title insurance

This insurance covers the buyer if someone challenges the property’s title after taking ownership. A single payment at closing pays the insurance premium. Often, the seller agrees to make this payment.

Property taxes

As a seller, you’re responsible for paying property taxes until your closing date. If you have unpaid property taxes, the buyer may agree to pay them in exchange for you reducing the property’s purchase price.

Real estate agent commissions

Sellers usually pay real estate agent commissions, typically 4% to 6% of a property’s purchase price. The commission is typically split between the seller’s and buyer’s agents.

Transfer taxes

A transfer tax is assessed by your local government when you sell or transfer a property from yourself to a new owner. The amount varies by state and city.

Loan-Specific Closing Costs

Some home loans come with unique closing costs. Here are three real estate loan products with closing costs.

Home equity loans or home equity lines of credit (HELOCs)

Lenders may charge fees for home equity loans or home equity lines of credit. These fees are usually 2% to 6% of a loan amount.

Refinancing

Mortgage refinancing fees vary by lender, but typically are 2% to 6% of the loan amount. This may seem high, but refinancing is a loan process similar to a purchase; the only difference is that you already own the property and don’t have to include a seller in the equation.

VA home loan

U.S. military veterans and active service personnel may be eligible for a VA home loan. These mortgages are supported by the U.S. Department of Veterans Affairs and administered by mortgage lenders. 

To help pay for the loan program, the VA charges a fee of 1% to 5% of the loan amount. Your down payment amount, term length, and type of military service impact your fee. 

However, the VA exempts some lenders from charging this fee, so it’s worth shopping around before choosing a lender.

How to Get Closing Costs Waived

In a perfect world, closing costs would be waived completely, but that’s not reality. Expect to pay closing costs one way or the other. 

If you’re lucky enough to have a seller willing to negotiate, they may agree to pay most or all of your mortgage closing costs, leaving you with minimal fees to cover.

If not, here are a few other ways to cover most closing costs:

• Negotiate with the lender: Review the loan estimate, which shows the estimated closing costs, and negotiate with the lender. If you do some comparison shopping with investor-friendly lenders, you’ll have a greater chance of negotiating lower closing costs with your chosen lender.
• Negotiate with the seller: As mentioned, sellers can help with closing costs if you negotiate it as part of the purchase contract. Depending on the size of your down payment, sellers may be able to cover a large part of your closing costs.
• Find a no-closing-cost mortgage: Some lenders offer no-closing-cost loans. This means you’ll pay a higher interest rate for the loan to cover the cost of not paying closing costs, but you’ll need less money upfront at the closing.
• Wrap the closing costs into your loan: Some lenders allow you to wrap your closing costs into the loan. This increases your monthly mortgage payments but requires less money at the closing.

Prepare for Closing Costs Ahead of Time

Closing costs are a part of the process when buying or selling a home, or even when refinancing or borrowing against a property’s equity. 

Knowing the estimated closing costs before closing on a property can help you choose the right loan or property, as the costs can add thousands of dollars to buying or selling a home.