When buying a home, most prospective homeowners focus on the purchase price, rightfully so, as the purchase price is by far the largest line item cost of purchasing property. But just like buying a car from a car lot, there is more to the total cost of purchasing a home than just the sticker price. (Before we go down this rabbit hole, I want to clarify that I'm speaking generally about customers using a mortgage to purchase their home. Cash buyers have significantly fewer closing costs to pay.) An easy way to think about the cost of purchasing a home is to break things into two categories: long-term and short-term costs. Think of the purchase price, interest rate, property insurance, taxes, and sometimes mortgage insurance as the long-term costs. These items will be paid for the life of the loan or at least for the first several years. Think of the closing and prepaid costs as the short-term cost of purchasing a home. Most of the time, these are costs that a buyer must pay at closing, not over the life of the loan. Today, we will talk about line item closing costs, referring to an actual American Land Title Association (ALTA) statement from a closing that took place a few years ago, redacted to protect the customer's privacy.

I'm shooting you straight; this is some boring stuff... I mean, it's boring, and there's a lot of information to digest. However, as a buyer, understanding the process is a good idea. You'll know what's happening when we're sitting at the closing table, and the ALTA is passed around. After all, it's your money.

I'm going to hyperlink our example ALTA everywhere you see the acronym. It's a three-page document; changing pages is done at the bottom using the arrows. When looking at the ALTA, you will see that it is broken into four columns: two on the right are for the Buyer/Borrower, and the two on the left are for the seller. A debit and credit column is individually listed for the Buyer and Seller. You can see that the first entry is the property's purchase price, which is a credit of $475,000 to the seller and a debit for the same amount on the buyer's side. See how this works? The buyer is giving(debiting) the dollar amount of the house to the seller, giving the seller the credit created by the debit. Numbers will go from the buyer to the seller and vice versa, debiting and crediting funds back and forth to each other until we get to the bottom, where we find the final reconciled amount that the buyer will be bringing to closing. This amount is often referred to as "Cash to Close,"  which is the amount the buyer must bring to the closing table as their "closing costs." Real quick, a buyer doesn't always pay their portion of the closing costs at the closing table. Some, such as a VA Funding Fee, can be added to the mortgage, and sometimes, during negotiations, a seller will agree to cover all or a portion of the buyer's closing costs. The term "closing costs" is loose as well. It often includes down payments and interest buydowns. In our example, the seller agreed to cover a portion of the buyer's closing costs due to damage found during the inspection. The buyer paid the remaining balance, which included the down payment amount, with a certified bank draft. Okay, let's dive in. If you still need to open the ALTA, click here.

After the sale price, the first entries on the ALTA are on the right side(Buyer). Various credits have been given to the buyer; we see the actual amount borrowed by the buyer, and it looks like the lender owed a little money, so it's a credit to the buyer. You will see a $6,000 debit from the left (Seller) side as a debit over to the right side as a credit to the buyer, giving the buyer $6k towards their closing costs as compensation for needed repairs. I highlighted this to show how a seller pays a buyer's closing costs. We see the final credit for the property tax proration from the seller to the buyer. We will break down the buyer's debits or costs from this point forward. You'll see them on the inside column on the right side. Remember, we aren't balancing or reconciling the ALTA today. We are just breaking down the buyer's closing costs.

Moving toward the bottom of page 1, we will see the "Loan Charges to XXXXX XXXX Mortgage LLC". These are fees that the lender charges to originate and process the loan. Let's not beat up our lenders here; not all of these items are fees. We see that the buyer chose to pay down their interest rate up front, which cost them $4,328 and $1,293.31(we have two entries due to a delay in the closing). We also see various charges to third-party contractors that the lender paid on behalf of the buyer while under contract, such as the appraisal, pest inspections, and flood certificates. We also see the VA funding fee, but it's not a closing cost because it will be rolled into the loan amount. The lender's processing fee and underwriting fee are there, too. Oh, and there's that MERS fee that is funny to me. Mortgage Electronic Registration Systems(MERS) is a database created by lenders to be used by lenders, but charged to the customer. Side note: I learned about MERS when a customer told the lender to kick rocks and made the lender cover it. Lender fees are where you'll be happy if you shop lenders and don't focus on the interest rate alone.

So far, we have covered the lender's costs totaling $8,303.69($5,621.74 of this amount was added voluntarily by the customer to buy the interest rate down). Let's continue down the ALTA to the "Impounds".

An impound account is the same thing as an escrow account; escrow is the term that most people are familiar with. An impound/escrow account is simply an account that the lender creates. The closer sticks money in from the buyer to get things started, and the lender uses this account to pay for items such as insurance and taxes during the life of the loan.  The closer "impounds" monies from the buyer into the account, the lender holds it there until the first tax or insurance payment is due and pays it on the customer's behalf. Looking at the ALTA under "Impounds," we see that the closer is setting aside money for property taxes, insurance, and a negative integer as an aggregate adjustment. In straightforward terms, the Real Estate Settlement Procedures Act (RESPA) caps the amount the lender can escrow to one-sixth of the annual tax rate; the aggregate is the lender ensuring that the legal checks are in the blocks by refunding the balance that exceeds the cap.

We are trucking right along now. We've covered the lender's costs and the impounds, totaling $8,419.14 in buyer's closing costs.

The next section on the ALTA is "Title Charges & Escrow/ Settlement Charges". The title company is the one for whom the closer/closing attorney works. In Northeast Florida, it's customary for the seller to pay for the title company. However, many services that the closer uses to transfer titles have fees. These fees are passed on to the buyer. We see them on the ALTA as a Closing Fee, Title Endorsements, Tech Fees, Lenders' Closing Fees, etc. Yep, these are also closing costs that the buyer must pay.

Let's sum things up again! After adding title charges, the buyer's closing costs are currently up to $11,530.64.

The following section on the ALTA is the "Commissions" section. Some brokerages, mine included(EXIT 1 Stop Realty), charge a brokerage fee to buyers. We don't see a brokerage fee to the buyer here because I generally cover this fee for my customers.

CURRENTLY, on paper, all commissions are paid for by the seller; we can skip this section as buyers. However, I can open another wormhole of conversation on this topic. The buyer has always paid the commissions because the buyer is paying for the property! How else do the funds get there to pay for everything and everyone? Just know that a Federal Judge ruled that a buyer must have a say in the commission negotiations, and things will change in the commissions section of the ALTA very soon.

We have nothing to add to the commissions sections, so we will move down to the "Government Recording & Transfer Charges" section. Yes, this is a section where the buyer pays taxes on the sale of the property, not to be confused with property tax. Yes, you get to pay for both! In this section, we see the Recording Fee, Tangible Tax(yes, a tax on the parts of the property you can touch), and the Intangible Tax(that's right if you pay a tax on the things you CAN touch, then you get to pay for taxes on things you CAN'T touch).

Adding the government fees to our running total, we are not up to $14,118.48. And that means that we are ready to move down to the final section, the "Miscellaneous" section.

The Miscellaneous section is the catch-all section where we stick things that don't fit above. This is the section where home warranties or repair invoice payments are added. In our example, the only fee in this section is the Homeowner's Insurance Premium. Adding the premium, we have a total of $17,561.48.

Now that we know what the total closing charges are—wow, they are expensive, it's time to calculate what the buyer's actual closing costs are. The seller gave the buyer a credit of $6,000. So we can subtract that from the closing cost total; we now have $11,561.48. Also, this particular buyer chose to prepay the interest rate down, costing them $5,621. Yes, this is considered a closing cost, but it's voluntary. Let's subtract this; we will have a closing cost of $5,940.48. When the contract was signed, the buyer submitted a binder deposit of $4,750. This money belongs to the buyers to do as they please; it's just a deposit. Some buyers apply it to principle, some buyers get it back as a check at closing, but most buyers apply it toward their closing costs. Let's subtract the binder from the closing costs; we now have $1,190.48 as the total amount the buyer will bring to closing and pay as closing costs. If we look at the ALTA, we see $54,054.95 as the total the borrower must pay at closing, also known as the "cash to close." Remember, closing costs also include down payments. Our example reflects the buyer making a down payment of $52,864. And that's it... These are what the buyer's closing costs are all about.

We made it through the ALTA and discussed how the buyer arrived at the final amount of cash they paid as "Closing Costs."  We can also see that closing costs are complicated and unique to every transaction. According to ClosingCorp, the average closing cost for a buyer in Florida is 2.3% of the total purchase price; that's $2,300 for every $100,000 spent. If you're thinking about buying, then it's time to start saving for the closing costs.

If you're considering purchasing a new home but don't have enough cash to cover your closing costs, email me. As I mentioned at the beginning, it is common to negotiate that the seller pays for the buyer's closing costs. This is especially true in the current buyer's market. Sellers are motivated to sell, and buyers have the leverage. During the post-COVID boom, it was the sellers who had the leverage. It's currently the buyer's turn, so why not use that leverage to your advantage?