5 Important Things to Know About Paying Closing Costs on Land
Buying land is a major financial responsibility. In addition to the down payment, this investment comes with many other expenses that can impact your final purchase price. Closing costs are extra expenses that are often overlooked. Though, they are very important to consider when deciding on your budget and shopping for land for sale. That’s why DiscountLots has taken a step further from the competition and doesn’t charge closing costs on land.
Taking the time to understand the costs might help you get financially ready and eliminate last-minute obstacles on your way to land ownership. Here are the five most important things you should know.
What Are Closing Costs?
Closing fees are extra charges typically representing 2% to 6% of the land’s purchase price. For example, if you’re purchasing land worth $500,000, closing fees could range from $10,000 to $30,000. Some closing costs are based on the loan amount. So the bigger the loan, the higher the fees will be. Closing fees are typically paid when the property title is formally transferred from the seller to the buyer. As a buyer, you pay them when closing on the land in cash. However, you can incounter some situations where these expenses happen before the closing date.
What Do Closing Costs on Land Include?
The closing fees you’ll have to cover as a land buyer will depend on the state where you’re purchasing your plot of land, as well as the property features and the loan type. Here’s a rundown of the most prevailing closing fees.
Common Land Closing Costs
Escrow fees: Sometimes, a certain amount of property taxes and insurance must be paid upfront into an escrow. The lender will hold these funds until your premiums have to be paid.
Appraisal fees: Lenders usually require appraisals to estimate the property’s market value. Professional appraisers require several hundred dollars for their services, but you won’t be able to get a loan without one.
Flood certification fees: If the plot of land is in a flood zone, the lender may ask you to obtain flood insurance before confirming your loan.
Property taxes: You might have to pay a prorated amount of property taxes. The final amount you’ll have to pay depends on when you purchase the plot.
Land survey fees: Sometimes, a survey has to be done to determine the lot’s boundaries lines and dimensions, and you’ll have to pay the costs for the professional surveyor’s service. Depending on the property and the intricacy of the job, these fees could reach up to $800.
Recording fees: When you complete the land purchase process, the new deed must be recorded with the city or county public land records. The closing costs cover the prices for the service.
Loan-Related Closing Costs
Application fee: The lenders charge fees for loan applications. The amount varies depending on the state and can be as much as $500. The application fee is non-refundable even if you don’t get loan approval.
Underwriting fees: During underwriting, the lender investigates your financial situation and assesses the risk that you’ll default on the loan. Usually, they charge underwriting fees as compensation for the time and money spent in the process.
Credit report fees: If the expense of obtaining your credit report isn’t included in the loan application fee, you’ll have to pay for it separately.
Additional Insurance-Related Costs
Private mortgage insurance: Private mortgage insurance (PMI) is required when the down payment is below 20%. You can pay it fully at the time of closing or include it in your monthly payments.
Title insurance: The buyer must pay a one-time premium of roughly $1,000 for the typical title insurance policy.
Who Pays Closing Costs on Land Sales?
The land buyer covers most closing costs on land, including the commission given to the real estate agent. However, there are situations when the seller pays the closing costs on land. You could try to negotiate some of the closing expenses, such as homeowners insurance, underwriting fees, application fees, and title insurance. However, you might not be successful if there’s a lot of interest in the vacant land you want to purchase. And if it’s the seller’s market, the seller will probably have no interest in contributing to your closing costs.
How to Lower Your Closing Costs
Even though you must pay closing expenses, there are a few pointers that could save you some money in the process.
Look for lenders that provide discounts: Working with a mortgage lender willing to give you a discount or waive the origination cost is a great way to save money. You can also request a discount or charge waiver if you’re acquiring your mortgage through your bank, as you’re already a customer.
Use a loan with no closing costs: Investigate no-closing-cost loans, but don’t let the word misslead you. Closing expenses for no-closing-cost loans are still incurred; they are simply added to the interest rate.
Close on the land at the end of the month: Closing at the end of the month means less money in prepaid interest which significantly lowers the overall closing costs on land.
Smart Budgeting for Closing Cost Fees
Before you start looking at plots of land for sale, get preapproved for a mortgage so you understand your closing costs and what you can afford. Since many factors such as the type of loan, type of property, type of occupancy, and your credit score, can determine your closing costs, it’s best to be as specific as possible with the mortgage lender. Also, always budget with the high end prices in mind. The run-up to closing day comes with a hefty price tag, so being prepared is crucial.
Closing Costs on Land: The Bottom Line
When buying a plot of land, you need to be aware that the closing costs account for a substantial amount of the final land price. You must pay yours upfront and in cash, so it’s best to be prepared ahead of time. Hopefully, our closing cost guide has shed light on the matter and helped you budget better to avoid unpleasant surprises down the road. If you want to save more money, buying your dream land via DiscountLots is the best option. We offer flexible payment and term options and most importantly, don’t charge any closing costs.
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