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Ask Tracy: What are Closing Costs?

Dear Tracy,

What are closing costs? How much will they cost a buyer?

A: Buyer’s closing costs can run 2-5% of the loan amount, depending on a number of variables. Since many costs are prorated over the month and year in which the property closes, there can be a wide range of costs.

More questions a buyer can ask are “What are Non-Recurring and Recurring closing costs? Can someone else besides the buyer pay them?" Now we are talking some complexities here.

Lenders will typically allow sellers and/or agents to pay a buyer’s non-recurring closing costs. The limits are up to 6% of the sales price if the buyer is putting down 10% or more, 3% if the down payment is less. Some lenders allow someone else to pay recurring or non-recurring costs, but this does not include prepaid interest.

Really important to know is that lenders will now only allow the credit to be the actual amount of the closing costs in the transaction. So even if 6% is allowed, if you only have 2%, that is what the seller can pay and no more. And credits relating to repairs or improvements are NOT allowed.

Here are typical recurring and non-recurring closing costs:

Non-Recurring:

  • Points (origination fee)
  • Appraisal
  • Credit report
  • Escrow fee
  • Sub escrow fee
  • Title insurance fee
  • Underwriting fee
  • Processing fee
  • Document prep fee
  • Tax service contract
  • Wire fees
  • Flood
  • Certification
  • Recording fees
  • Realtor client service fee

Recurring:

  • Prepaid interest
  • Taxes
  • Fire insurance
  • Private mortgage insurance.

What to do? The only solution to how to give more money back to the buyer is to reduce the price. Or forget about getting the credit.

Another beautiful morning in Paradise!
Last TracyTalk Newsletter of the Year!

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