The difference between closing costs and down payment doesn't really affect the bottom-line dollar amount that's needed at the closing table. After the escrow officer tallies up the buyer's debits and credits on the HUD-1 Settlement Sheet, there will only be one check to bring in when it's time to sign escrow papers. Understanding the escrow settlement process and the difference between the two amounts can help you look for inaccuracies and ensure that funds are directed to the right place.
A down payment is the amount of money you contribute toward the purchase of the home, while the closing costs are the assessed fees that need to be paid in order to complete the deal.
Understanding Closing Costs
Closing costs are fees associated with the cost of obtaining a home loan and escrow services when closing on a home mortgage. These fees include items such as the appraisal, lender origination fees, escrow handling charges, wire transfer fees, discount points, lender's title insurance and prepaid taxes and insurance premiums. The amount of closing costs may come as a shock to inexperienced borrowers, and many times may total up to 3 percent of the purchase price.
Reviewing Down Payments
The down payment for a home is applied directly toward lowering your total loan amount and is not to be confused with settlement or closing costs. Normally based on a percentage of the total sales price, the amount is typically established early in the loan application process with your lender. While down payment amounts can vary from 3.5 percent for an FHA loan to upward of 20 percent for certain conventional loans, normally the source of the money must be verified and approved by the lender.
Reading the HUD-1 Settlement Sheet
Your escrow agent will prepare what is called a HUD-1 Settlement Sheet, a required form created by the Department of Urban and Housing Development. This form lists all the debits and credits for both the buyer and seller of the real estate settlement. Your down payment and an itemized list of closing costs and related settlement charges are clearly detailed on the form so that each charge or required fee is easy to understand. Check your HUD-1 Settlement Sheet carefully to ensure its accuracy.
Determining the Final Amount Owed
Both the down payment amount and closing costs are required at the same time, at the closing table and lumped together into one large payment. The settlement sheet, after any credits such as the earnest money deposit or seller contributions are tallied, has a final amount owed by you, the buyer. This amount also includes all settlement charges, the required down payment and any miscellaneous and prorated fees.
- Real Estate Pro Articles: Real Estate Closing Costs Who Pays What?
- Federal Reserve Board: A Consumer's Guide to Mortgage Settlement Costs
- Mortgage 101: What Are Typical Mortgage Down Payments
- HUD: Settlement Statement (HUD-1)
- NAIC. "The Smart Consumer’s Guide to Reducing Closing Costs," Page 4. Accessed March 26, 2020.
- Michigan State Housing Development Authority. "MI Home Loan." Accessed March 26, 2020.
- FDIC. "Down Payment and Closing Cost Assistance," Page 21. Accessed March 26, 2020.
- Consumer Financial Protection Bureau. "What Fees or Charges Are Paid When Closing on a Mortgage and Who Pays Them?" Accessed March 26, 2020.
- Consumer Financial Protection Bureau. "Learn About Loan Costs." Accessed March 26, 2020.
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- Quicken Loans. "What Are Mortgage Points And When Are They Worth It?" Accessed March 26, 2020.
Meribeth Phipps has been a real estate broker since 2000, specializing in residential new home sales. She holds a bachelor's degree in business and marketing.