How to estimate conventional loan closing costs

For homebuyers, a conventional mortgage is a common route to take. If you’re considering a conventional loan, you may be wondering what inevitable costs will be tied to the closing.

In this article, we’ll cover what conventional closing costs are, how to estimate closing costs, how conventional loan closing costs are broken down, how to potentially reduce costs and save money, and finally, if you should apply for a conventional loan. 

What are conventional closing costs?

Conventional loan closing costs encompass various fees associated with the necessary services required to secure a mortgage. Whether you are purchasing a home or refinancing, you will be responsible for covering these closing fees.

Generally speaking, the expenses range between 3% and 6% of the loan amount. So if you’re calculating the closing cost on a house that was purchased for $400,000, it would likely range between $12,000 and $24,000. If you purchase a $500,000 house, your closing costs would typically range from $15,000 to $30,000.

The dollar amount itself may seem steep, but it’s important to know that it’s not just one total cost — and many of the components can be lowered through negotiation. That example of $30,000 on a $500,000 purchase would be the sum of many different costs across a variety of categories, each with their own rules and guidelines. We’ll review the breakdowns in the next section.

How are conventional closing costs broken down?

Conventional loan closing costs are typically broken up into a list of standard fees that are fairly universal among all mortgage loans. They vary in price, but the sum of each is what will get you to 3% to 6% of the loan amount. While these fees can differ from one lender to another, here's a list of some of the most common fees associated with closing:

• Origination fees (including underwriting fees, courier fees, and more)
• Notary fee
• Title insurance costs
• Appraisal fee
• Credit report fee
• Title search fee
• Prepaid home costs

Understanding these closing fees is crucial for making an informed decision during the loan process. If the fees are seemingly higher than anticipated, you may want to consider a different type of loan or find ways to reduce the costs. We’ll go over some options for fee reduction in the next section.

How to reduce conventional loan closing costs

While closing costs cannot be avoided, it is possible to lower them based on the current market and your creditworthiness as a buyer. There is always room for negotiating closing costs — you could decrease certain fees or have them assumed by the lender. This would require a bit of research and open communication with your lender.

There is also the option of shifting certain fees to the seller. We call these seller concessions. Typically more popular during a buyer’s market, seller concessions can alleviate up-front expenses — giving you more financial flexibility for down payments as well as repairs or upgrades to the house. Just make sure you know exactly what the seller is already paying for before making any additional requests.

While the concessions can cover a wide range of closing expenses, it's worth noting that there are limits to how much a seller can contribute. The type of loan, down payment size, and type of property will dictate the cap. For instance, if your down payment is less than 10%, the seller can contribute up to 3%. If your down payment is greater than that, the seller can contribute more. It’s best to know the established conventional loan concession limits before you negotiate with the seller.

One other way to reduce your conventional loan closing costs is by lowering the cash you need to bring to the closing table by using a down payment assistance program. Local municipalities and state governments will often offer grants to qualified homebuyers. Make sure you do your due diligence and investigate the opportunities in your community.

Should you apply for a conventional loan?

So, now you know more about the closing costs that come with conventional loans. But you may be wondering if you should apply for a conventional loan.

It’s a best practice for any homebuyer to assess their financial situation before applying. Understanding your strengths and financial limitations are an essential step in determining if this type of loan is right for you.

As with all mortgage options, certain costs are inevitable — but you're not navigating this journey alone. Asking questions, talking with professionals, and conducting thorough research to assess your decisions is crucial. The more effort you invest in comprehending the process, the greater flexibility you'll gain to minimize the closing expenses that come with conventional mortgage loans.