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In my practice, we are often asked about closing costs. Buyers and sellers are anxious to know what exactly “closing costs” comprise of and how much they will affect their bottom line. It’s a legitimate question and I think it’s critical to examine this topic further. Buying or selling a home for the first time can be full of surprises, and closing costs, in particular, make both parties quite nervous.
What are Closing Costs?
Closing costs are fees that are paid at a real estate closing when the property title is transferred from the seller to the buyer. These costs are incurred by either the buyer or seller (or both) and vary widely based on where you live, the selling price, and the mortgage loan you have.
What do Closing Costs Cover?
Below is a list of typical buyer and seller closing fees paid in Texas. Keep in mind that some of these fees may vary or might even be avoided. For instance, if the buyer gets a no-closing-cost mortgage, or if the buyer negotiates with the seller to cover some of their closing fees.
Buyer Closing Costs:
- One-half of the escrow fee
- Lender’s title insurance policy premium
- Property taxes (prorated from closing date till the end of the year)
- Recording fees for all documents in buyers’ names
- Homeowner’s insurance premium for the first year
- Inspection fees
- All mortgage loan fees (except those required by the lender for seller to pay)
- Home Owner Association (HOA) transfer fee (depending on the contract, may be paid by seller)
Seller Closing Costs:
- One-half of the escrow fee
- Work orders (repairs done following the home inspection)
- Buyer’s title insurance premium
- Real estate agent commissions
- Any judgments, tax liens, etc. against the seller
- Residential home warranty (according to the contract, but it’s typical for a Seller in Texas to pay towards a warranty provider)
- Any unpaid HOA dues
- HOA Resale Disclosure fees and HOA transfer fee (according to the contract)
- Any loan fees required by the buyer’s lender
- Recording charges to clear all documents of record against seller
- The payoff of loans in the seller’s name (or existing loan balance being assumed by buyer), including interest accrued, re-conveyance fees, and pre-payment penalties
How are Closing Costs Determined?
Closing costs are primarily determined by the home’s purchase price and the type of mortgage loan. In total, sellers can expect to pay about 8% of the closing costs, in which the most significant costs go towards title insurance and realtor commissions. Buyers can expect to pay about 2%, inclusive of the loan origination and financing fees, homeowners insurance, and prorated property taxes, on top of the other standard closing fees.
Keep in mind that some closing costs are negotiable between the buyer and seller, or negotiable between the buyer and lender. Lenders are required to provide home buyers with a good faith estimate within three days of applying for a mortgage, so buyers know before the closing, what their costs will be. However, this is just an estimate, and some fees can increase up to 10% at the time of the closing.
How are HOA Dues Pro-rated at the Closing?
HOA dues are typically paid at the beginning of the year and are prorated just like real estate taxes. The only difference is that HOA dues are a debit to the buyer and a credit to the seller, based on the closing date, assuming that the seller had already paid the dues for the full 12 months.
How are Property Taxes Pro-rated at the Closing?
Just like Federal income taxes, property taxes in Texas are paid for the previous year. The entire tax bill is paid between October 1st of the tax year and January 31st of the following calendar year.
Therefore, if the closing takes place before October 1st, the seller would be charged from the beginning of the year through the closing date, and the buyer would be credited for the same period.
If the closing takes place after October 1st when official tax figures are released, title companies would charge the buyer and the seller their prorated tax amounts and pay the taxes directly on their behalf. This assures the title company that taxes have been paid when issuing the mortgage lender their title insurance policy.
What are the Title Fees at Closing?
The Texas Department of Insurance (TDI) https://www.tdi.texas.gov/ regulates title insurance premium rates, which are based on the property’s sale value. Therefore, Texas title agents must charge the same premium for all properties of equal value.
TDI provides a chart for determining title insurance basic premium rates, which includes the costs for title examination, closing fees, and issuing the policy. This premium is paid only once at the closing, usually by the seller on behalf of the buyer. If buying a new construction home, the buyer would likely pay for their owner’s policy instead of the builder.
The buyer usually pays for the cost of the loan policy issued to their mortgage lender. Loan policies cost less than owner’s policies, and both are one-time premium payments, which are made at the closing.
Are Closing Costs Tax Deductible?
Some, but not all, closing costs are tax-deductible, as long as you provide a list of itemized deductions on the 1040 form. According to the IRS, the following are deductible costs:
- Sales tax issued at closing
- Property taxes paid at closing
- The mortgage interest paid when the cost was settled
- Real estate taxes that were paid for by the mortgage lender
- Prepaid Interest (interest accrued between closing and the date of the first mortgage payment) paid at the closing
- Loan origination fees (also referred to as “points”), which are written as a percentage of the borrowed money
Do FHA & VA loans have Additional Closing Costs?
If the buyer has an FHA loan, they’ll be required to pay the up-front mortgage insurance premium (UPMIP) of 1.75% of the base loan amount. They can also roll this into the cost of the loan if preferred.
If the buyer is using a VA loan, they may be required to pay a VA funding fee at closing or roll this fee into the cost of the loan. This fee is a percentage of the loan amount that the VA assesses to fund the VA home loan program. However, some borrowers may be exempt from this fee. The rate depends on the type of service and down payment amount.
I hope this has been helpful or at least informative to prospective buyers or sellers in Texas. For additional questions, please feel free to reach out to the firm for a complimentary initial consultation.
I built my law practice on the premise of being a life raft in a sea of sharks. I want to be an advocate for those that have been wronged and are too intimidated to seek help. My firm is here to explore your options, guide you through your legal journey, and give you that safe space to ask questions! There’s no such thing as a stupid question…Only the ones you don’t ask. So, my question to my clients is not “do you have any questions?” But rather “what questions do you have?”
As always, the Kazi Law Firm is standing by to help you in your time of need. Don’t hesitate to contact us today. We specialize in real estate law, landlord-tenant disputes, immigration, and wills & estate planning. Family is at the core of our practice. Just as we treat our family with respect and understanding, we treat yours. Come join the Kazi Law Firm family today!
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