What Are Settlement Charges When Buying a Home?

Settlement charges, also known as closing costs, are the various fees and expenses incurred by buyers and sellers to finalize a real estate transaction. These charges go beyond the property’s purchase price, covering administrative, legal, and financial services needed to transfer ownership. Both parties typically pay some costs, but amounts and allocation vary based on transaction type, location, and negotiated terms. Understanding these costs is important for all parties. Homebuyers should anticipate these costs, which can range from 2% to 5% of the loan amount or 3% to 6% of the purchase price.

Categories of Settlement Charges

Settlement charges include various fees, each covering a specific service to complete the property transfer and secure financing. These charges are broadly categorized by purpose and responsible party.

Lender-related fees are a significant part of settlement charges for buyers with a mortgage. An origination fee, typically 1% of the loan value, covers the lender’s administrative costs for processing and underwriting the loan. An appraisal fee determines the property’s market value. Lenders also charge a credit report fee to assess creditworthiness.

Other lender-specific charges include flood certification fees and tax service fees. Borrowers may also pay discount points, usually 1% of the loan amount per point, to reduce the interest rate.

Title and escrow fees ensure clear property ownership and secure transaction completion. A title search fee examines public records to confirm the seller’s right to transfer ownership and identify any liens. Lender’s title insurance is typically required by the mortgage lender to protect their investment against future title claims. Owner’s title insurance, while optional, protects the buyer’s equity against similar defects. Escrow fees, also known as closing or settlement fees, compensate a neutral third party, like a title company or escrow agent, for managing the closing process, holding funds, and distributing payments.

Government recording and transfer fees are statutory charges imposed by state and local authorities for documenting property transfer. Recording fees are paid to the county or municipality to record the deed and mortgage documents in public records. Transfer taxes, or documentary stamp taxes, are levied by state, county, or municipal governments on real property transfers. These taxes are calculated as a percentage of the sale price and vary by jurisdiction.

Prepaid items are recurring expenses paid at closing to cover periods beyond the closing date. Property taxes are often prorated, with the buyer paying the seller for their portion up to the closing date. Homeowner’s insurance premiums for the first year are typically paid in full at closing. If the property is part of a homeowners’ association (HOA), initial HOA dues or prorated amounts may also be collected.

Other third-party fees include additional services for the transaction. A survey fee pays for a professional survey to confirm boundary lines and identify encroachments. Attorney fees are charged if a real estate attorney represents a party, prepares documents, or provides legal advice, which is required in some states. Inspection fees, such as for general home or pest inspections, are paid to professionals who assess the property’s condition; these are sometimes paid outside of closing.

Understanding the Closing Disclosure

The Closing Disclosure (CD) is a standardized, five-page document summarizing the final terms of a mortgage loan and real estate transaction costs. This required disclosure, under the TILA-RESPA Integrated Disclosure (TRID) rule, details all loan and transaction costs, ensuring transparency for the borrower.

Lenders must provide the Closing Disclosure to the borrower at least three business days before the scheduled closing date. This review period allows time to examine the document, compare it against the initial Loan Estimate, and ask questions before signing. Discrepancies should be promptly addressed with the lender or closing agent.

The Closing Disclosure itemizes settlement charges. Loan costs are in Section A, detailing charges like origination, appraisal, and credit report fees. Section B lists services the borrower cannot shop for, such as flood certification, while Section C includes services they can shop for, like title services and surveys. Other costs, including government recording and transfer fees, prepaid items like property taxes and homeowner’s insurance, and initial escrow payments, are in Sections E and F.

The Closing Disclosure differentiates between charges a borrower can and cannot shop for. This distinction allows borrowers to compare prices for services like title insurance or surveys, potentially reducing overall costs. Reviewing the CD diligently helps ensure accuracy, identify unexpected fees, and confirm terms align with the transaction understanding.

Paying Settlement Charges

Paying settlement charges is a key step in finalizing a home purchase. The total amount a buyer needs to bring to closing is called “cash to close.” This figure includes the down payment, all applicable settlement charges, and any initial escrow deposits, minus any credits received.

Common methods for delivering funds at closing are wire transfers or certified/cashier’s checks. Personal checks are not accepted for large sums due to clearance time. Wire transfers are preferred for their speed, moving funds electronically to the escrow or closing agent’s account.

When using a wire transfer, verify instructions directly with the closing agent through a confirmed, independent method, like a phone call to a known number, not solely email. This prevents wire fraud, where fraudsters divert funds. Confirming the recipient’s name and bank account details safeguards funds.

Credits can reduce the final “cash to close” amount. These may include seller credits, where the seller pays a portion of the buyer’s closing costs as part of the purchase agreement. Lender credits can also reduce closing costs in exchange for a slightly higher interest rate.