Closing costs are an integral part of buying or selling a home. These are fees and expenses, beyond the sale price. They vary based on the property’s price and location. Some expenses are flat, some are a percentage, and some are related to services. In Philadelphia and surrounding areas, they typically range from 4%-8% of the sale price.
For sellers, closing costs are collected from their proceeds at settlement. For buyers, there are various ways to structure when and or how they’re paid. Let’s explore what these costs entail and how buyers can plan for them effectively.
Loan-Related Costs
The type of loan you select impacts your down payment and associated costs. Your financial qualifications, including credit score, income, employment history, and available cash, determine your options.
Once that’s established your agent can help you discover additional benefits like grants, discounts, and credits based on your home buyer status. For instance, you could qualify for first-time home-buyer benefits if you haven’t owned a home for a specific period or don’t have any open mortgages. The economics and demographics surrounding your current and/or future neighborhood can also help you earn grant money to use toward your down payment, reduce your minimum down payment, and/or eliminate PMI (Private Mortgage Insurance) requirements.
The possibility of combining and stacking these benefits is specific to the location and lender where you’re buying. One of many reasons we recommend working with a local lender who’s familiar with the ins and outs of the Philadelphia area. Other location-specific nuances include real estate taxes, city and state transfer tax rates, homeowner’s insurance rates and types, and traits typical of the geography or architecture of the home type you’re buying. We feel so strongly about using a local lender we have an entire blog about it!
Down Payment is not a Closing Cost
The question still remains, what is included in that 5% buyer’s closing costs? Items in there related to your mortgage might include:
Appraisal
This is required by the lender to ensure that an impartial third party verifies that the property you choose is worth the price you’re paying. Approximate cost ranges from $400-650. Your finances or loan type could potentially advance you past this step, or cause it to happen twice.
Flood Certificate
Also required by the lender to confirm the property’s flood insurance requirements or lack there of. Minimal, less than $10
Tax Certificates
There are two or more kinds of services related to taxes and mortgages. One confirms your property tax amounts. One relates to the administration of collecting and distributing your property taxes. Another involves obtaining or verifying your tax returns as they correlate to your mortgage application and approval. Cost ranges from $40-100
Digital Tracking Services
Follows your mortgage as it’s bought, sold, and recorded throughout the life of your loan. It cost less than $25
Broker Compensation
Includes application fee, processing fee and or origination fees usually translate to commissions. This one can vary dramatically. Philly Home Girls only recommends lenders whose fees are fully disclosed and itemized. Our recommendation is to raise questions if your loan estimate identifies any line item higher than $2000.
Points to reduce Intrest Rates
On occasion, a buyer can reduce their interest rate by buying points. If there is excess seller’s assist or grant money you may be able to apply towards rate reducing points. Note that if using sellers assist funds it must be an amount above the maximum allowed by the lender that cannot be applied to the down payment, or refunded to the buyer at closing.
Title Insurance
Title insurance protects against legal disputes or claims on the property. Like a car’s, a house’s title is a record of the chain of ownership proving the house (or car) hasn’t been stolen, and tax events that occurred from a sale or inheritance, or past mortgages on it were paid. In the background, during your due diligence period, your title company will pay to search for any flaws in your property’s title and ensure your seller has the legal right to sign the deed over to a new owner. Your mortgage company requires this insurance so that their mortgage is always paid ahead of any other liens that show up in the chain of title before or after your purchase. You buy this insurance once, pay for it at closing in your closing costs, and it covers the life of your ownership through your turn as the home’s seller.
In PA title insurance companies are highly regulated. Every title company charges a rate set by the state. There’s one rate for the amount of your loan (the lender’s title policy) and one for your down payment (the owner’s title policy). Use this calculator provided by the country’s biggest title insurance underwriter to estimate your title insurance rate.
There are additional charges called endorsements for insuring single parcels, new construction, condos, homeowner associations, etc. Title insurance rate calculators disclose those as well.
Other title charges include doc prep, delivery fees, tax stamps. They’re typically all disclosed but some can be avoided. Philly Home Girls always recommends the in-house title company at our Brokerage, Elfant Wissahickon. We disclose that it has a profitable, financial arrangement with the brokerage. Our recommendation is rooted in avoiding unnecessary junk fees. Having a built-in book of business lessens an ethical company’s likelihood of charging extraneous junk fees. If you’re shopping for a discount title company, chances are they will not provide the level of service you can expect from an in-house title company, and the discount will be eliminated by potentially undisclosed, extraneous junk fees. Our recommended title company’s closers attend your settlement in person, arrive early, and walk you through the entire closing process including reviewing your deed, and your mortgage loan documents if your lender does not attend settlement. It is their job to collect and pay any debts against the property from the seller and ensure they are paid off.
Taxes and Government Fees
After title insurance, transfer tax makes up the largest portion of your closing costs. Transfer tax is sales tax. The city of Philadelphia receives 3.278% of the sales price in addition to 1% charged by the state of Pennsylvania. The total of 4.278% is split evenly between the buyer and seller.
The city of Philadelphia also charges flat fees to record documents. The seller pays a satisfaction fee to remove their mortgage from the public record. The buyer also pays a fee for the folks at City Hall to record the deed and mortgage. There can be additional endorsements depending on the accompanying documents like a power of attorney or multiple parcel numbers in the case a parking space may have an additional tax account. The fees are a matter of public record and can be found here on the Department of Records’ website in seven different languages.
Property tax is a whole other ball of wax. At closing you’ll pay the current year’s taxes but pro-rated, which means the day you close until January 1 the following year. If the seller has already paid those taxes, the charge will be identified as a reimbursement to the seller.
On the day of closing you’ll also pay a portion of your property tax for the calendar year after you close.
Escrows
During the home buying process, the word escrow can be used interchangeably and seemingly in as many ways as smurf, or jawn. Check out our Escrow Blog to learn how to sling that term around your transaction.
Although it’s lumped into your closing costs, the amounts collected and directed to your escrow account are pre-payments rather than fees. Your mortgage comes with an escrow account and the T & I of your monthly PITI payment (Principal, Interest, Taxes, and Insurance) goes in there. These accounts buffer against future rate increases, ensuring timely payments.
Your mortgage company typically requires intercepting these payments to make sure you never default on property taxes or homeowners insurance. They lent you money to buy a physical asset, and they want to know if it goes uninsured or is in imminent danger of being repossessed by the tax man.
Escrow amounts fluctuate based on the season you buy your home. Your homeowner's insurance will always be due on the anniversary of your home purchase. Your Philadelphia property taxes are always due in February so the closer you close to the end of the year, the more the mortgage company collects to ensure you have one full year’s worth of taxes stored in escrow when it comes due.
After your 1st anniversary as a homeowner, you’ll receive your first escrow statement. If any overages were collected, you can apply them to future payments or request a refund.
Broker Compensation
The brokerage where your real estate agent hangs their license sets a commission rate to prevent discrimination. When you hire them in writing you agree to pay their fee at closing as part of the purchase price, as part of your closing costs, or a combination of the two. If rates are high and you have the cash, it’s advantageous to pay your broker’s compensation as a line item in your closing costs rather than including it in your offer price. If you don’t have the extra cash, you can agree to include it in the price. This is the most common way it is paid, regardless of how much cash a buyer has on hand.
Your agent’s brokerage also charges a flat fee per transaction. Elfant Wissahickon REALTORS ® brokers the Philly Home Girls team and charges a flat fee of $495. At your initial conversation with an agent, they should disclose how much their brokerage’s flat fee is and what it covers.
POC (Paid Outside of Closing)
During your initial buyer consultation, there's a good chance you’ll review a sample closing cost estimate with your agent. You’ll notice a few line items marked POC (paid outside of closing). You’ll want an accurate estimate of your total costs regardless of when they’re paid. For example, your home inspector gets paid directly at the time they conduct your inspection, termite test, and radon inspections. It’s common to be charged for your appraisal ahead of closing as well.
Other Costs
If you’re buying a condo or PUD in a homeowner’s association, expect to pay a capital contribution of at least one month’s worth of HOA or Condo Fee and a prorated month’s worth of the monthly fee for every day of the month you are buying in (1/30th or 1/31st unless you’re buying in February). The same goes for annual fees.
If you’re buying a foreclosed home, REO, or bank-owned property, expect to pay the seller’s closing cost in addition to your own.
Wire transfer fees, expedited shipping of paper documents, and electronic document fees will pop up during the transaction process and closing process but should never be more than $50 per incident.
Lightening the load
Philadelphia has some dynamite homebuying programs that can provide thousands of dollars to use towards closing costs and/or down payment. Philly Home Girls’ clients have great success buying homes with as little as $1,000 out of pocket. Lenders and banks also have various grants and programs available. Often any of these options will have income limits or geographical requirements. More information can be found at our home buyers programs blog and our free virtual workshops that we host monthly.
Negotiating a seller's assist is another way to avoid paying your closing costs out of pocket. Your agent can structure your offer to direct a portion of the price toward paying your closing costs. It is accurate to describe this as mortgaging your closing costs because they’re included in the price of the home. Be aware of fees that are a percentage of the purchase price increasing incrementally. For example, if the home is listed for $100,000 and you bought it with a 3% seller’s assist, the seller is agreeing to give you $3,000 at closing from their proceeds to use toward your closing costs. The seller would net the same if you offered them $97,000 and paid your closing costs with cash, and your title insurance and transfer tax would be based on your $97,000 purchase price, rather than $100,000. The seller’s percentage-based closing costs, like commission and transfer tax, would also be based on $100,000, not $97,000. The assist helps lower the buyer’s cash requirement, not the seller’s bottom line, but having a buyer is the goal, so win-win, the seller assists the buyer!
Understanding closing costs is crucial for navigating the homebuying process with confidence. With the right knowledge and support from Philly Home Girls, you can plan effectively and achieve your homeownership dreams.
