Update as of December 2015: Please note the HUD-1 has now been replaced with a CLOSING DISCLOSURE, and GFEs have been replaced. Contact us for more info or to discuss the differences in these documents!
Many buyers are aware that there are fees related to the purchase of a new home—a rough guide is 2.5% to 3% of the transaction value—but what are these fees, and are there ways to minimize them?
First, a few clarifications. Both buyers and sellers have closing costs in a transaction. The sellers’ costs are typically much higher than the buyers’ fees because the sellers pay the commission for both real estate brokers. These fees are typically paid at closing—they come out of the sellers’ proceeds, and the buyers can either pay cash, or can negotiate to have their portion of the closing costs paid by the seller (read more here.)
For now, let’s focus on the buyers’ fees. Your lender should provide you with a Good-Faith Estimate (GFE) when you apply for a loan. This GFE is essentially an estimate of your “HUD-1” form, which you will receive at closing. Each lender has their own preferred format, but you should be able to compare apples-to-apples by looking at the section headers, or, even better, the line-item numbers. It’s important to note, though, that lenders only control certain sections, while others may be simply based on their own experience. When comparing lenders, it’s important to focus only on the line items that the lender actually controls.
The fees vary by jurisdiction, broker, and settlement attorney, but below is a good way to categorize them:
- Pre-paids: These are generally required by the lender, and may include insurance, property taxes, and interest. Another common prepaid item is condo/HOA fees. These vary based on the day of the month that you close, since they are pro-rated between buyer and seller.
- Points: A point represents 1% of the loan balance and are charged by lenders. This, along with the fees, can easily amount to thousands of dollars, so it’s important to discuss this with your agent and your lender.
- Fees: These are fees charged by real estate brokers, settlement attorneys, and lenders, and are the toughest to judge for “reasonableness” without experience. These vary widely, particularly among lenders. Some real estate agents will pay their broker’s fee on your behalf—be sure to ask them. For lenders, whose fees can be substantial, it’s important to know early in the process what they’ll charge. These fees can generally be found on your Good-Faith Estimate in the 800 section, but look in the 1300 “Additional” section, too. Broker’s and attorney’s fees are scattered throughout the closing statement sections.
- Title Insurance: This is paid by the buyer and, depending on the policy, can amount to thousands of dollars. It’s a one-time charge that covers you in the event of a problem with the chain of ownership. See my post on how to save some money with title insurance here. This fee is addressed in the 1100 section.
- Government and Transfer Charges: These are fees that are paid to the local jurisdiction and can be quite substantial. For example, in the District of Columbia, the transfer taxes (paid by the seller) and recording taxes (paid by the buyer) are 1.1% each. Northern Virginia sellers pay $1 per $1000 in value for their transfer taxes.
This is just a high level summary of some of the most common items on a HUD-1, so be sure to ask your agent to walk you through the expenses and strategize with you on how to minimize your costs! Read more about how to spot “junk fees.”