Understanding the Closing Costs of a Conventional Loan

May 31, 2023 | Mortgage Guides

Breaking Down the Expenses: Understanding the Cost of a Conventional Loan

When you buy a home, you need to pay closing costs. These are fees associated with the purchase and paid at closing. They can range from 2-5%.

Closing costs can vary depending on the location of the property, the type of loan, and the financier. It’s important to get pre-approved for a mortgage so you know how much you can afford and factor in these costs when budgeting for the purchase. Read on to learn more.

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Types of Closing Costs

Closing costs are fees associated with the purchase of a home, which is the final step in the home-buying process. Some closing costs can be rolled into the loan, while others must be paid out of pocket.

  • Title insurance: This protects you and the lender in case problems with the title to the property transpire.
  • Escrow fees: These cover the cost of things like property taxes, homeowners insurance, and mortgage insurance.
  • Loan origination fees: These fees are charged by the lender to cover the costs of processing the loan.
  • Appraisal fee: This is paid to an appraiser to determine the value of the property.
  • Inspection fees: These are paid to inspectors to check for problems with the property.
  • Survey fee: This is paid to a surveyor to map the property.
  • Attorney fees: These are paid to an attorney to review the purchase contract and closing documents.
  • Recording fees: These are charged by the government to record the purchase of the property in the public records.

Understanding the Loan Estimate

A loan estimate is a document that lenders provide to borrowers within three days of receiving an application. It provides details about the terms of the loan, including the interest rate, payment, and closing costs. The loan estimate is a legally binding document, and the lender cannot change the terms without the borrower’s consent.

The loan estimate is an important document for borrowers. Before signing the agreement, make sure that the terms are acceptable. Borrowers should also note that this is just an estimate, and the actual terms of the loan may differ.

The Role of the Lender

The lender’s role in closing costs is to provide an estimate. The creditor will also explain what will be paid by them, what the borrower needs to pay, and how these fees are calculated.

Settlement Statement

A settlement statement, also known as a closing statement, summarizes all the financial details of a real estate transaction. It is prepared by the closing agent, often a title company or escrow company, and is given to the buyer and seller at the closing. The settlement statement includes information on the purchase price, the down payment, the closing costs, and all other fees or expenses associated with the sale. It also shows how the proceeds from the sale will be distributed to the buyer, seller, and other parties involved in the transaction.

The settlement statement is a legal record of the terms of the sale. 

Preparing for Closing Costs

  1. Get pre-approved for a mortgage: This will give you an idea of how much you can afford and the closing costs.
  2. Shop around for a mortgage: There are many lenders, so compare rates and fees.
  3. Request a home inspection: This will identify potential problems with the property.
  4. Get title insurance: This will protect you in case problems arise with the title to the property.
  5. Get homeowners insurance: This will protect your home and belongings in case of a fire, theft, or other disaster.
  6. Set aside money: Closing costs can be expensive, so having enough money to cover them is crucial.
  7. Be prepared to negotiate: The seller may be willing to negotiate on closing costs.
  8. Review all the paperwork: Before you sign, make sure you understand it.
  9. Ask questions: If you have questions about closing costs or anything else related to your home purchase, ask your real estate agent or mortgage lender.

Closing costs can be a significant expense, but they’re essential in the home-buying process. 

The Escrow Account

An escrow is a financial account held by a third party (often a title company) in which money is deposited to pay for certain expenses, such as property taxes, homeowners insurance, and mortgage insurance. Escrow accounts are required as part of the closing process for a home purchase.

The money that is required to be placed in escrow will vary depending on the property and the lender. However, it is common for the escrow account to be equal to one month’s worth of property taxes and homeowners insurance premiums. The lender requires that the escrow account be funded at closing and that the borrower pays into it to cover future expenses.

An escrow account is a valuable tool for homeowners because it ensures that their property taxes and homeowners insurance premiums are paid on time. This can avoid late fees and penalties and protect the homeowner’s investment.

When purchasing a home, be aware of the escrow account requirement. You should also understand the terms, such as how much money is required to be deposited and how often payments are due.

Mortgage Insurance

Mortgage insurance protects lenders in case a borrower defaults. Most lenders require it for borrowers with a down payment of less than 20% of the home’s purchase price. There are two main types of mortgage insurance: private mortgage insurance (PMI) and government-backed mortgage insurance (FHA).

Mortgage insurance can help borrowers qualify for a mortgage. However, note that mortgage insurance can add to the mortgage payment.

Homeowner’s Insurance

Homeowners’ insurance covers the following:

  • Damage to the home from fire, theft, vandalism, or other causes
  • Loss of personal belongings due to theft or damage
  • Liability for injuries or damage that occurs on the property
  • Medical expenses for guests who are injured on the property
  • Loss of income if the home is uninhabitable due to damage

Homeowners insurance is not required by law, but it is recommended. The cost of homeowners insurance varies depending on the value of the home, the deductible, and the coverage options chosen.

Tips to reduce closing costs

  • Shop around for the best interest rate and loan terms.
  • Get pre-approved for a loan before you shop for a home.
  • Ask the lender about closing cost assistance programs.
  • Consider making a larger down payment.
  • Negotiate with the seller on who pays for closing costs, especially if the market is slow.
  • Look for ways to reduce the price of the home.
  • Consider buying a home that needs some repairs or updates. 
  • Be prepared to walk away if the fees are extreme.

Closing costs can be a significant expense when buying a home. By following these tips, you can make your home purchase more affordable.

Conclusion

Closing costs can be a significant expense when buying a home. However, there are ways to reduce them. By understanding the costs involved in a conventional loan, you can prepare for these expenses and make the best financial decision for your home purchase.

If you have questions or concerns about the closing costs of a conventional loan or other homeownership resources, contact Wesley Mortgage today!

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