Welcome back, future Michigan homeowners!

We’ve talked about finding your dream home, and now it’s time to talk about another important part of the home-buying process: closing costs and pre-paid expenses. Closing costs and pre-paid expenses are the set of fees and expenses you’ll need to pay in addition to your down payment when you officially buy the house. It might seem like a lot of extra money, but understanding what these costs are and how much to expect will help you be prepared and avoid any surprises.

Think of closing costs like the fees you might pay when you finalize a big purchase, like taxes and registration when you buy a car. They cover various services and administrative tasks that need to happen to transfer ownership of the property from the seller to you and to fulfill a commitment for a mortgage by the lender.

What kind of costs are included in closing costs for a home purchase in Michigan?

There are several different categories:

• Lender Fees: These are charges from your mortgage lender for processing your loan. They can include things like:
  • Loan Origination Fee: A fee for setting up your loan.
  • Appraisal Fee: This pays for a professional to assess the fair market value of the home. Your lender will require this to make sure they aren’t lending you more than the house is worth.
  • Credit Report Fee: This covers the cost of the lender checking your credit history.
  • Underwriting Fee: This is for the lender’s work in reviewing and approving your loan.
• Title-Related Fees: These costs are related to making sure the property’s title (proof of ownership) is clear and legally transferred to you. The title company is also the settlement agent and plays a very important role in purchasing a home in Michigan.  They often include:
  • Settlement/Closing Fee: The title company will have a representative at each closing to explain the documents, answer questions, notarize signatures and disburse the funds at the end of the closing.
  • Title Insurance: This protects both you and the lender against any future claims or disputes about the property’s title. There are usually two types: lender’s title insurance and owner’s title insurance (which protects you).
• Government and Recording Fees: These are fees charged by the local or state government to record the transfer of ownership. In Michigan, this might include:
  • Recording Fees: These fees pay for officially recording the deed (the legal document that transfers ownership) with the county.
  • Transfer Taxes: Some cities or counties in Michigan might have local transfer taxes when property ownership changes. This really only applies to those selling a home, but some have agreed to pay them on behalf of the seller, in a effort to make their offer more attractive to the seller.
• Escrow and Prorated Costs: These involve setting up an escrow account (if you have one) and dividing certain expenses fairly between you and the seller:
  • Escrow Account Setup: If you’re setting up an escrow account with your mortgage, you will need to deposit a certain number of months of property taxes and homeowners’ insurance to initially fund the escrow account. The number of months depends on when you close and when property taxes come due next. 
  • Prorated Property Taxes: You’ll likely need to reimburse the seller for any property taxes they’ve already paid for the period after you take ownership. In Michigan, most cities/counties property taxes are paid in advance. Example, city summer tax covers a period from July 1^st through June 30^th of the following year; and county winter tax covers a period of December 1^st through November 30^th of the following year.

How much can you expect to pay in closing costs in Michigan?

It can vary depending on the price of the home, the type of loan you get, and the specific location within Michigan. Generally, closing costs and pre-paid expenses can range from 2% to 5% of the purchase price of the home. So, for a $200,000 home, you might expect to pay somewhere between $4,000 and $10,000 in closing costs and pre-paid expenses.

Are there ways to reduce closing costs?

Sometimes, you might be able to negotiate with the seller to have them pay for some of the closing costs, or you might be able to shop around for different service providers (like title companies). Also, some first-time homebuyer programs in Michigan, like those offered by MSHDA, can offer assistance with closing costs. We talked about some of these in a previous post!

Understanding closing costs is a key part of being financially prepared to buy your first home in Michigan. Make sure to ask your lender for a detailed breakdown of these costs early in the process so you know what to expect.

In our next post, we’ll move on to the exciting stage of making an offer on a home you love!

Ready to better understand the closing costs involved in buying your first home in Michigan?

I can provide you with a clearer picture of the potential fees you might encounter and discuss any programs that might help with these expenses. Don’t hesitate to reach out with your questions – I’m here to help you navigate the financial side of homeownership in Michigan!