Home Buying Closing Costs

As if scraping together a down payments and looking for financing to purchase a new home was not enough, home buying closing costs is often another of the many surprises in the journey!

There are so many small fees and expenses which can add up fast enough, and if you are not ready for it, can start to spoil the excitement of finding a new place to call home. 

In this article, we will go over:

• What are home buying closing costs?
• Breakdown of the common types of closing costs
• What might be a typical estimate to budget for home buying closing costs.

What Are Home Buying Closing Costs?

Home buying closing costs refer to the various fees and expenses associated with finalizing a real estate transaction, specifically when purchasing a home. These costs are paid at the "closing" or settlement stage, which is the final stage of the home buying process.

Closing costs are separate from the actual price of the home and are typically paid by the buyer. They cover a range of services and expenses, such as loan processing fees, appraisal fees, title search and insurance, attorney fees, government taxes, recording fees, and any prepaid expenses like property taxes or homeowners insurance.

Essentially, closing costs are the additional expenses you need to consider and pay when completing the purchase of a home, on top of the down payment and mortgage payments.

Most Common Types of Closing Costs

1. Completion of Payment or Down Payment:

In the Purchase and Sale Agreement you will have agreed to a purchase price. In addition, you will likely have agreed to a "deposit" amount. The deposit amount would have been paid to the seller or the real estate agent in "escrow" (A trust account which would be separate from their regular business accounts).

The total purchase price, less the amount of the deposit, will need to be paid to your Lawyer or Title Company on or just before the closing date.

If you have a mortgage, then you will be responsible for providing the difference between the above amount, less the amount of the mortgage. This is generally known as the "Down Payment".

2. Mortgage Payment:

If you have arranged for a mortgage with a Lender, the loan confirmation will need to be supplied in advance of the closing date to your Lawyer or Title Company and they usually work with the Lender (or Bank as the case may be) to receive the funds required for closing.

You will need to ensure the Lender has approved the mortgage well prior to the closing date. Just because you received a "pre-approval", it does not always guarantee the actual property you are now buying will be approved. Make sure you receive a formal "confirmation" from the Lender with all the particulars for the property in question to prevent any last minute surprises.

The closing documents will reflect the amount received from the lender, and is generally not something a buyer has to worry about collecting.

3. Legal Fees and Disbursements:

Regardless of whether your municipality, county, state or province requires you to use the services of a professional law firm (Lawyer or sometimes referred to as a Solicitor in Canada), or if you use what is known as a "Title Company" to complete the legal transfer of a property from one owner to another, there will be fees associated with the completion of the purchase and sale.

These fees are typically a fixed fee regardless of the value of the property. 

There will also be "disbursements" associated with the purchase and sale related to fees charged by third parties to the title company or law firm. These costs are incurred to facilitate the ownership transfer and are usually charged at cost to the purchaser or buyer. These are separate from the fees charged for legal services themselves.

Here is a short list of the most common types of disbursements:

• Government fees related to property or title searches (county offices for example)
• Title Registration fees
• Trust account fees
• Taxes - various levels of governments tend to find reasons to want to charge a tax on property purchases and it varies from location to location.
• Unpaid taxes - if you are buying a property "as is"
• land transfer taxes
• municipal or county fees to set-up new account for water and sewer
• mortgage or bridge financing surveyor other fees
• If there is an HOA or Condominium Corporation involved then there may be additional fees related to outstanding monthly fees or special assessments.
• courier costs related to shipping documents
• wire transfer fees
• additional fees if the closing is delayed to deal with the necessary legal processes resulting from closing dates changing.

The exact issues which pertain to your property purchase will depend entirely on where the property is located. Make sure you engage a legal team early on and they should be able to give you a detailed estimate of the anticipated closing cost disbursements.

4.  Insurance, Utility, and Other Costs:

The purchaser must usually pay for a few additional things that are necessary on or before closing which are not completed by the legal team.

Home Insurance will need to purchased prior to closing so you can provide the information to your lender, and often collected by your legal team to provide to the municipality to satisfy a legal requirement. This can often range in the $1000-$2000 per year, and usually a minimum monthly payment will need to be paid to initiate the insurance contract.

Utility costs related to the initiation of various utilities to the property and will vary entirely on location. Some utilities are provided by the municipality, others by private companies and may not be included in the services provided by the legal team on closing. So be sure to ask which services they take care of in the disbursements and which ones you will need to take care of on your own.

In addition, if you are buying a more rural property there are potentially certificates for septic or water well systems you will either WANT to have done prior to closing or will NEED to have done. Sometimes the responsibility can be placed on the Seller for these items, and other times it will be the buyer. If you have an experienced Realtor or legal team engaged early on they should help you sort these issues out.

What Should I Budget?

Even though it pays to do a detailed estimate based on the actual costs likely to be incurred in the area where you are buying, that may not be an option when you first start out looking for homes.

What or how should I put budget together you ask?

Well, even though there may be some surprises, closing costs mostly tend to fall in a certain range. When I was doing investing, we would use a rule of thumb of carrying 2% of the purchase price for closing costs. 

We would modify this number as the particulars of an area proved consistent enough to change the estimate.

An experienced Realtor may also be able to give you a better guesstimate or confirm if a 1%, 2% or 3% rule would be good for most situations.

Remember though - YOU are responsible for doing your own homework and don't blame others if the estimates are wrong once the details become more apparent. Closing costs should not be the make or break point in the purchase decision anyways. If your budgets are that tight, you may want to revisit purchasing a house which will bring you that close to breaking the bank.

**  In addition to the above, you may want to check out our Home Buying Contingencies page for other related home buying costs!

Home > Cost of Buying a Home > Home Buying Closing Costs (This page)