Buying your first home in the US: closing costs explained

Most first-time buyers in the United States spend months saving a down payment and then discover that the down payment is not the only cheque they need to write. Closing costs, the fees and prepaid items due when the sale completes, typically add between two and five per cent of the purchase price for a buyer. On a $600,000 apartment that is somewhere between $12,000 and $30,000, and it is due in cleared funds days before you receive the keys.

This guide explains what makes up that figure, which items you can shop around for and which you cannot, and how to read the Loan Estimate and Closing Disclosure that your lender must send you. It is general information for buyers in the US and is not legal or tax advice; costs vary a great deal between states and even between counties.

What closing costs actually pay for

Closing costs fall into three groups. The first is lender charges: origination or underwriting fees, the appraisal, credit report and, if you choose to buy them, discount points that lower your interest rate. The second is third-party services such as the title search, title insurance, the survey where one is required, attorney or escrow fees and a home inspection. The third is government charges and prepaid items: recording fees, transfer or mortgage taxes where they apply, the first year of homeowner’s insurance and an initial deposit into the escrow account that will later pay your property tax and insurance.

In some states the seller pays transfer tax by custom, in others the buyer does, and a few split it. New York adds a mortgage recording tax on the buyer’s side that surprises many people buying their first condo, while Texas has no state transfer tax at all. Ask your agent which local customs apply before you finalise a budget.

• Lender fees: origination, underwriting, application and processing charges
• Appraisal, credit report and flood certification
• Title search and lender’s title insurance (an owner’s policy is optional but strongly recommended)
• Attorney or escrow company fees, depending on the state
• Recording fees and transfer or mortgage taxes
• Prepaid homeowner’s insurance, property tax and interest from the closing date to month end

Reading your Loan Estimate

Within three business days of applying, your lender must send a three-page Loan Estimate. Page two breaks the costs into sections lettered A to J, and the sections that matter most are B and C. Section B lists services you cannot shop for, so the lender controls those figures and they may rise only within narrow limits. Section C lists services you can shop for, such as title and settlement services, where the lender gives a provider list but you are free to choose your own.

Compare estimates from at least three lenders on the same day. Ask each to price the same loan amount, rate lock period and point structure, otherwise the totals are not comparable. A slightly higher rate with lender credits towards closing costs can suit a buyer who plans to move in five years, while paying points can pay off for someone staying twenty.

The Closing Disclosure and the final walk-through

At least three business days before closing you will receive the Closing Disclosure, a five-page document that should match your Loan Estimate closely. Compare them line by line. If the loan product, the annual percentage rate or the prepayment penalty changes, a new three-day review period starts. Query anything that has grown beyond the tolerance limits with your lender in writing.

Do a final walk-through within 24 hours of closing. Check that agreed repairs were completed, appliances that stay are present and no damage has occurred since the inspection. Wire fraud targeting buyers is common: always confirm wiring instructions by calling a phone number you already know, never one in an email.

Ways to reduce what you pay

Closing costs are partly negotiable. Sellers will sometimes contribute towards a buyer’s costs, particularly in slower markets, and lenders offer credits in exchange for a slightly higher rate. First-time buyer programmes run by state housing finance agencies can offer grants or deferred loans for down payment and closing costs if your income and the property price fall under local limits.

Choose your closing date carefully. Closing at the end of the month reduces the prepaid interest you owe at closing, because interest is charged only from the closing date to the end of that month. A short-term saving, but a free one.

Build a cash buffer on top of the figures above for moving costs, immediate repairs and furniture. Buyers who stretch to the last dollar for the closing table often struggle in the first three months of ownership.

If you are weighing up a purchase, our New York and Miami agents can walk you through a line-by-line cost estimate for a specific property, free of charge. Get in touch through the contact page and mention that you would like a closing cost worksheet.