Understanding Homebuying Closing Costs

While buying a home can be a stressful process, it also can be a very worthwhile and exciting investment for homebuyers. Homeownership is proven to be one of the most effective ways to improve the financial, social, and generational well-being of individuals, their families, and their communities. Fannie Mae's data-driven, evidence-based Consumer Housing Journey uncovers the most common barriers consumers face when buying a home.

One of the obvious barriers to homebuying is the cost of buying a home, beyond the down payment, and ensuring the homebuyer has cash reserves for ongoing homeownership expenses. This barrier is especially challenging for low-income homebuyers who experience greater difficulty in saving for a down payment or building up cash reserves. Although the down payment is typically the largest consideration when it comes to a purchase, it also is important to consider the amount of closing costs as these expenses can reduce the homebuyer's down payment or cash reserves.

Closing costs vary by state and sometimes by county, and on average comprise between 2% - 6% of the purchase price amount, according to NerdWallet. If the purchase price is $300,000, closing costs could range somewhere between $6,000 - $18,000. With affordability being top of mind for homebuyers, our analysis shows that median closing costs as a percentage of the purchase price are higher for low-income first-time homebuyers and historically underserved homebuyers. In fact, 14.5% of low-income first-time homebuyers have closing costs that are greater than or equal to their down payment amount.

Furthermore, our research shows that closing costs tend to be regressive. In a sample of approximately 1.1 million conventional home purchase loans acquired by Fannie Mae in 2020, median closing costs as a percent of the home purchase price were 13% higher for low-income first-time homebuyers than for all homebuyers, and 19% higher than for non-low-income repeat homebuyers.

Closing Costs Add Up
Many homebuyers are not aware that closing costs may include various fees associated with their home purchase. Here are a few examples of closing costs homebuyers may be responsible for paying when they purchase a home, in addition to their down payment:

• Appraisal fees cover the cost of having a licensed professional assess a home to estimate its market value. The cost of appraisal fees may range between $300 - $600. These fees can be higher based on supply/demand, the type of appraisal used, volume, and appraiser availability in a particular market.
• Home inspections are a common way for homebuyers to learn about any issues with the home, reducing the risk of needing to pay for unexpected repairs shortly after purchasing the home. Inspections usually occur once the contract is signed by all parties, and most contracts include an inspection period.
• Lender fees refer to the various charges associated with processing, approving, and funding a loan, and usually are 1% to 2% of the loan amount.
• Prepaid expenses, such as property taxes and homeowners' insurance, are costs a homebuyer is expected to "prepay" during the closing process. Homeowners' insurance is required prior to buying a home, and many lenders will collect a portion of the annual premium at closing. Additionally, depending on when a homebuyer purchases the home, the homebuyer may need to prepay some of the annual property taxes to close on their home.
• Real estate attorney fees are paid at closing in areas where a real estate attorney is required to coordinate closing and draw up paperwork for the title transfer. Real estate attorney fees vary and depend on state and local rates.
• Title insurance comes in two forms (both of which are regulated at the state (not federal) level): a policy for the homebuyer and a policy for the lender. The homeowner's policy protects the homeowner from any losses or damage related to the title, or ownership, of their home. A lender's title insurance policy, which is generally required by many lenders of residential mortgage loans, only protects the lender's (or investor's) interest in the loan. The cost of the lender's policy is typically passed on to the borrower as part of the closing costs. The cost of title insurance varies by state, and a homebuyer can expect to pay up to 1% of the purchase price in some instances.

While paying closing costs on top of the down payment can be challenging – there are many ways to help reduce closing costs for all potential homebuyers.

Help for Homebuying Closing Costs
Many homebuyers are unaware that they can use gifts, grants, and Community Seconds® funding to help with their down payment and closing costs. In fact, Fannie Mae allows funds for part or all of a down payment and closing costs to come from these three primary sources:

• Gifts from any individual who is related to the homebuyer by blood, marriage, adoption, or legal guardianship, and certain non-relatives who share a familial relationship with the homebuyer.
• Grants from entities such as nonprofit organizations, federal, state, and county agencies; state and local Housing Finance Agencies; employers; and even the lender.
• Community Seconds® mortgages can come from many of the same sources as grants, but a second lien is placed on the property. A lien on a house is a legal claim or right against a property used to ensure payment of a debt. Note: Fannie Mae does not purchase Community Seconds mortgages, but it does purchase first-lien mortgages where there is also a Community Seconds mortgage.

Ways Fannie Mae Can Help
Fannie Mae continues its efforts to bring sustainable homeownership within reach of homebuyers, particularly in this difficult housing market, while appropriately managing risk. Within the last year, we've done the following:

• Allow gifts from a non-relative who shares a familial relation with the homebuyer to be used for a down payment and for closing cost funding. These types of non-relatives include a domestic partner or relative of the domestic partner, godparent, former relative, or individual engaged to marry the homebuyer.
• Match borrowers with down payment and closing cost assistance through our down payment assistance tool. Though much of the costs associated with purchasing a home are covered by the mortgage, the down payment and closing costs are due from the homebuyer to the lender at closing before the move-in date. Funding those expenses can be a challenge for many homebuyers. Fannie Mae partnered with DownPaymentResource.com to help homebuyers find the funding they need.
• Introduce a targeted special purpose credit program (SPCP). We worked directly with a select group of lenders across specific geographic communities to test our ability to help first-time homebuyers who can afford a monthly mortgage payment but may not have sufficient funds for the down payment and closing costs. Our SPCP is designed to test the hypothesis that down payment assistance, closing cost assistance, and free homebuyer education and other supporting counseling can effectively be used to improve access to mortgage financing and sustainable homeownership. We are looking at ways to continue expanding the program's reach and outcomes over time based on the pilot outcomes.
• Allow lenders the option to use an attorney opinion letter (AOL) or a traditional lender's title insurance policy on some transactions. In April 2022, we updated our Selling Guide to permit lenders this option as a potential way to reduce closing costs for borrowers, while responsibly managing risk for Fannie Mae. On average, borrowers have saved over $1,000 when an AOL was used. For purchase transactions, average borrower savings have been more than $500, even when the borrower chose to obtain an owner's title insurance policy. The update to our Selling Guide gives lenders more opportunities to use AOLs, and does not address title coverage for the homebuyer. Our Selling Guide has no requirements regarding homeowner's title coverage, and a homebuyer always has the option to purchase a homeowner's title insurance policy or other title insurance alternative to protect against a homeowner's title-related risks.  
  • Note: While the change to our Selling Guide is relatively new, AOLs have been used on select mortgage transactions for decades. Our April 2022 change aligned Fannie Mae's policy with Freddie Mac's Seller/Servicer Guide, which has permitted the sale of loans with AOLs since at least 2008. Fannie Mae has also purchased more than 10,000 loans with AOLs since 2009, and has not experienced losses from title claims on these loans. In recent years, improvements in the searchability of title records have made title-related claims relatively rare, and losses due to those issues rarer still. The widespread digitization of real estate records and technological advances have made it significantly more efficient to accurately determine the status of title.
• Offer 3% closing close credit for qualified low- and moderate-income purchasers of Fannie Mae real estate-owned properties – with the total credits to date exceeding $3 million.

Looking ahead, we will continue engaging with industry partners and providers to implement solutions aimed at reducing homebuyer closing costs, and we are expanding consumer education to empower more people to learn about the homebuying and mortgage processes. Fannie Mae remains committed to engaging with industry partners to explore ways to help homebuyers with the homebuying and mortgage process. This includes exploring new and innovative options to help with closing costs – especially for low-income first-time homebuyers.