Recurring vs. Non-Recurring Closing Costs!

I am all set and ready to buy a home what are my closing costs and how much out of pocket do I need?

This question is one that I here very often. As a consumer I would want to know this as well. This would be a significant part of what helped me make my decision. Like they say an informed decision helps make the choice that much simpler. Ok so I made that saying up but it is what I believe.

Recurring Closing Costs – Costs that will continue to be paid throughout the ownership of the home – Recurring costs should actually be named Homeowner expenses in advance. Commonly they are called Pre-Paid Items. These items include the following:

Hazard Insurance – one year in advance + 3 months reserves (reserves needed if impounding which is a requirement on all loans that exceed 80% LTV)

Property Taxes - Pro-rated taxes based on purchase date + specified number of months to be impounded determined based on the month that you close. EX. July = 7 months taxes in advance

Pro-rated Interest – This is your first month’s mortgage in advance. It will be pro-rated from the date of close to the end of that month. Your first payment will be the following month on the first. EX. July 15th close date would require 16 days pro-rated per diem interest calculated on your interest rate. You would then have a first payment date of September first.

Mortgage Insurance – Although I do not find this common some lenders will ask for 1 month mortgage insurance in advance.

Miscellaneous – If there is a Homeowners association you may be required to pay a month or two upfront as well.

Non-Recurring Closing Costs – These are the expenses that we are trying to get the seller to pay. These are the one time fees that you have been putting money in the piggy bank for. You will not have to pay these fees ever again unless you buy another home or refinance your existing mortgage. These include but may not be limited to the following:

Origination – This is what the broker or the loan originator charge you to do your loan. Generally 1% on all FHA deals. This does not have to be a fee that you pay but your interest will rise if you choose not to pay it. See – Origination Definition for a more elaborate explanation.

Discount - See Discount Definition for more detail.

Broker Costs – The only fee that Capitol Mortgage Corporation charges its borrowers is $695 for processing. Many brokers will charge processing, admin, broker fee or many other miscellaneous. When in doubt ask.

Wholesaler Costs – Generally the wholesaler that will actually fund the money for you charges an Underwriting fee $750-$850, wire fee, tax service and a MERS which is electronic registration.

Appraisal – For Conventional done through HVCC and for FHA through an independent appraiser.

Credit – There is a cost for the Credit Report through a third party generally collected at the time of application.

Title and Escrow Fees – This is a third party gatherer of the docs. They will collect monies, sign the loan document, provide a preliminary title report, draw up the estimated settlement statement etc. There fees are determined by the loan amount and purchase price. The standard fees that are charged include but are not limited to: Title Insurance, escrow fee, doc prep, notary, Recording, courier, endorsement and other miscellaneous expenses.

I have found that Non-recurring costs generally run between 2.5-3% of the purchase price when you pay an origination of 1%. The lower the loan amount the higher that figure can be because there are set cost ie: $695 processing that is a higher percentage of 100K than it is of 200K.

Recurring Costs depending on the month and the amount of property taxes can range from 1-1.5% of the purchase price.

It is important to know the difference between recurring and non-recurring closing costs and have an understanding of who is going to pay what. You are responsible for the down payment and all of the costs recurring and non-recurring that the seller does not credit for.

EX: FHA PURCHASE 3.5% down payment requirement

100K Purchase Price – Down Payment $3500 (minimum statutory investment required by HUD)

Recurring Costs 1.5% or $1,500

Non-recurring Costs 2.5% or $2,500

Seller Agrees to Pay 3.5% toward closing or $3,500

Borrowers Estimated Cash to close would be Down Payment $3500 + Recurring Closing Costs $1500 + Non-recurring Closing Costs $2500 – Seller Credit $3500 = (3500 + 1500 + 2500) -3500 = $4000 cash out of the borrowers pocket. In this example the seller paid for all the Non-recurring costs and 1% of the recurring closing costs leaving the buyer responsible for down payment and .5% of the recurring costs or Homeowner expenses in advance.

*****Disclaimer – The Examples illustrated in the post are merely to paint a picture and may not represent your transaction. The purpose of this post was to explain the difference between loan costs and pre-paid homeowner expenses. If you have any questions regarding items in this post please add them in the comment section or call your Loan Officer.****

As always thank you for reading.