Saving for a down payment is only part of the cash you need to buy your first home. Closing costs, the fees and charges that come with getting a mortgage and transferring the property, can catch first-time buyers off guard. Here is what closing costs are, where to find them on your paperwork and how to plan for them so closing day has no surprises.
Flex Fuel does not promise approvals, loan terms or score increases. This article is general education, not financial or legal advice. Costs and practices vary by lender and location.
What are closing costs?
The Consumer Financial Protection Bureau defines closing costs, also called settlement costs, as the upfront costs you will be charged to get your loan and transfer ownership of the property. They are separate from your down payment, though both are part of the money you bring to closing.
According to the CFPB, when you buy a home you generally pay the costs associated with the transaction, although depending on your contract or state law, the seller may end up paying some of them.
Two forms you need to know
The Loan Estimate
The CFPB explains that a Loan Estimate is a three-page form the lender must provide within three business days of receiving your mortgage application. It shows the estimated interest rate, monthly payment and total closing costs. All lenders must use the same standard form, which makes it easier to compare offers. A Loan Estimate is not an approval; it shows the terms the lender expects to offer if you move forward.
The Closing Disclosure
The Closing Disclosure is a five-page form with the final details of your loan, including terms, projected payments and closing costs. The CFPB says the lender must give it to you at least three business days before you close. That window exists so you can compare your final terms and costs with your Loan Estimate and ask questions before you get to the closing table.
The CFPB's Closing Disclosure explainer calls those three days the time to resolve problems. If something looks different from what you expected, ask why.
Common closing cost line items
The CFPB lists common closing fees and charges such as appraisal fees, tax service fees, title insurance, government taxes and prepaid expenses. On the forms, you will typically see them grouped like this:
- Origination charges: upfront charges from your lender for making the loan. The CFPB notes these can include application, origination, underwriting, processing, verification and rate-lock fees, and that the total is what matters.
- Points: an optional upfront fee you pay the lender in exchange for a lower interest rate.
- Services you cannot shop for: third-party services the lender requires and chooses, such as the appraisal.
- Services you can shop for: required services where you may pick your own provider. The lender should give you a list of providers along with your Loan Estimate.
- Taxes and other government fees: costs for transferring the property and recording your mortgage with the county.
- Prepaids: items such as interest between closing and the end of the month, and homeowner's insurance. The CFPB says buyers usually pay the first 6 to 12 months of homeowner's insurance at or before closing.
- Initial escrow payment: money that starts your escrow account for future property taxes and insurance.
Closing costs vs. cash to close
These are not the same number. Total closing costs are the upfront costs of the loan and transaction, excluding your down payment. Cash to close is the actual amount you bring to the closing table.
The CFPB explains that Estimated Cash to Close includes your down payment and closing costs, minus any deposit you have already paid, any seller credits and other adjustments. You typically pay it with a cashier's check or wire transfer, and your lender will need to document where the money came from. Before you wire anything, confirm the instructions by calling your closing agent at a number you already know, not one from an email.
Ways to plan for and lower closing costs
Compare Loan Estimates from several lenders
The CFPB recommends requesting Loan Estimates from different lenders and says the best way to tell whether you have a competitive offer is to compare it with others. Compare origination charges line by line, and request estimates for the same kind of loan so the comparison is fair. Our post on FHA vs. conventional loans can help you decide which type to shop. The CFPB's mortgage shopping guide is another good resource.
Shop the services you can shop for
The CFPB notes that you can save money by shopping for the services listed as shoppable. You also choose your homeowner's insurance company, so compare policies.
Ask about seller credits
You can sometimes negotiate a seller credit toward your closing costs. The CFPB cautions that the seller will usually want a higher price in return, so you may still be paying those costs through your loan rather than out of pocket.
Understand lender credits before you accept them
A lender credit offsets some closing costs, but the CFPB says it is typically offered in exchange for a higher interest rate, or the lender may increase your loan amount. Ask how each option changes your rate and total cost.
Look into assistance programs
Some buyers qualify for programs that help with the down payment, closing costs or both. Our guide to down payment assistance explains how these programs generally work.
Get your credit ready first
Your credit affects the rate and terms lenders offer, which ripple into your closing costs and long-term payment. Months before you apply, review your credit reports. Flex Fuel clients use SmartCredit to see their credit reports and scores in one place and track changes as they prepare. Then work through our first-time home buyer credit checklist and read preapproval vs. prequalification so you know what to expect when you start talking with lenders.
Mapping out the cash you need to close on your first home? Book a time to go over your credit and closing-day budget with us.
How Flex Fuel helps
Flex Fuel works with future homeowners nationwide (we are based in Atlanta) to review all three credit reports, separate genuine errors from accurate history and build a written plan for payments, utilization and timing before you apply. We do not make lending decisions. Explore our services and see how our guarantee works.
Planning your first home purchase? Book a complimentary strategy session. We will review your credit reports with you and map out a timeline for your next steps.
Book a Consultation ›Frequently asked questions
When do I find out my closing costs?
You see estimated closing costs on your Loan Estimate, which the CFPB says lenders must provide within three business days of your application. Final costs appear on your Closing Disclosure, which you must receive at least three business days before closing.
Who pays closing costs, the buyer or the seller?
The CFPB says buyers generally pay the costs of the transaction, but depending on the contract or state law, the seller may pay some. You can also negotiate a seller credit.
Are closing costs the same as cash to close?
No. Closing costs exclude your down payment. Cash to close is the total you bring to closing, including your down payment and closing costs, minus deposits, credits and other adjustments.
Can I lower my closing costs?
Often you can reduce some of them by comparing Loan Estimates from several lenders, shopping for services you are allowed to choose and negotiating seller credits. Weigh lender credits carefully, because they usually come with a higher rate.
