Guide to Closing Costs in Iowa

Affordable housing paired with a low cost of living, some of the country’s lowest crime rates, and lush farmland, endless countryside, and rolling hillsides along the Mississippi River – that’s just some of the charm of living in Iowa. Are you a homebuyer ready to set roots in the Hawkeye State?

While homebuyers in Iowa diligently save up for a down payment, closing costs are often overlooked. Thirty-five percent of Americans are caught off guard by how costly closing fees are, and another 17 percent don’t even see this required expense coming. Private mortgage insurance, taxes, title insurance, and appraisal fees are some of the key expenses that most surprised homebuyers, according to a 2017 poll conducted for ClosingCorp, which researches residential real estate data.

In a nutshell, closing costs are an umbrella term, encompassing the final leg of services you’ll need before you secure the keys to your new home. This can include things like setting up a mortgage, conducting a home appraisal and inspection, ordering a title search, and coming up with the cash for homeowner’s insurance and property taxes. Typically, these fees are grouped together and paid for in a single lump sum.

So how much are closing costs in Iowa and how should homebuyers prepare for this expense? Here’s a look at the breakdown of closing costs, as well as tips on how Iowans can save some cash on this step in the homebuying process.

How Much are Closing Costs in Iowa?

Homebuyers in Iowa can breathe a big sigh of relief: Closing costs in the Hawkeye State are some of the lowest in the country, averaging $1,803 for a home priced at $156,726 according to a 2021 report by ClosingCorp. That price tag makes up 1.15 percent of the home’s price tag.

The Hawkeye State has the fifth least expensive closing costs in the country, just behind Arkansas, Arizona, Indiana and Missouri. Based on ClosingCorp’s data, it’s safe to say closing costs in the Midwest are, on a whole, cheaper compared to the rest of the U.S,; the national average for closing costs is $6,087.

But homebuyers in Iowa should save up a bit more than this initial estimate. This is because ClosingCorp’s data excludes a handful of key expenses, specifically the loan origination fees involved in setting up a mortgage and private mortgage insurance, which is required if you’re putting less than 20 percent down on your home purchase. Both expenses could add thousands of dollars to your closing costs tab.

ClosingCorp also didn’t take state-specific expenses into account. In Iowa, homebuyers may need to hire a property surveyor to outline clear boundaries around the property, for example.

Home values have also increased: The Iowa Association of Realtors pegged the median price for homes in the state at $202,500 as of August 2021. That same time the year before, home prices were, on average, $190,000.

Ultimately, homebuyers should count on spending about 2 percent to 5 percent of their home’s purchase price on closing day. With the 2021 price tag in mind, estimate closing costs to be around $4,050 to $10,125.

Keep in mind though, closing costs will fluctuate greatly depending on the price of your home and the complexity of the home sale.

What’s Typically Included in Iowa’s Closing Costs?

Iowans may be wondering how their closing costs tab can run as high as $10,000. You can categorize your expenses into two columns: Property-related fees, like a title search, property survey and home inspection; and mortgage-related fees, such as setting up your loan and securing private mortgage insurance.

Here’s a closer look at the closing costs breakdown for homebuyers in Iowa, including the state-specific details you’ll need to watch out for:

Loan Origination Fees

Getting a mortgage doesn’t come for free. Unless you have the cold hard cash to buy your home outright, the first expense rolled into your closing costs will be loan origination fees charged by your lender.

Loan origination fees are what your lender charges to open a mortgage account. It includes everything from setting up your home loan application, conducting an underwrite and pre-approval, and processing your funding at closing.

These fees make up one of the largest portions of your closing costs at roughly 0.5 to 1 percent of your loan amount. If you’re buying a home for $202,500, for example, closing costs could be between $1,012.50 and $2,025.

Credit Report Fee

Each time you apply for credit – whether it’s a credit card, personal loan, or mortgage – your lender will need to do a thorough credit check to make sure you’re a responsible borrower. A key component of the credit check is pulling your credit score to have an in-depth look at how you’re managing your existing debts.

Your lender will bill you for the full cost of requesting your credit report. In Iowa, costs up to $200 for everyone on the mortgage application.

Escrow Fees

In Iowa, title companies and real estate agents are permitted to manage your home purchase and the closing process. You may decide to recruit the help of a title company to guide you through the closing process and make sure you close on time without any delays.

One of the key things your title company will do is set up an escrow account, which is a neutral third-party account to hold onto your funds, such as your earnest money deposit. Basically, your seller (and the various vendors you’ve hired to help with your home purchase) won’t receive any funds until both parties have met all their conditions on the home sale, and the ink is dry on the property transfer. Instead, your title company will hold all cash in an escrow account.

Your title company will also help you with the checklist of things you need to have completed by closing. On closing day, it’s your title company that will meet with you and your seller to sign off on the final bits of paperwork and hand over the keys.

In Iowa, this is typically an expense that’s split down the middle between buyer and seller.

Iowa Title Search

During the closing process, your title company, lender, or attorney will order a title search on the property you’re aiming to purchase. A title search involves scanning historical records like deeds, court records, and property and name indexes to confirm the seller’s right to transfer ownership to you. A title search makes sure there are no outstanding ownership disputes, unpaid taxes, judgments, or lawsuits in process, so you can own the land free and clear once it’s transferred to you.

After the title search is conducted, many buyers need to follow up with a title insurance policy, but that goes out the window in Iowa. The Hawkeye State is the only state in the country that does not allow title insurance. Instead, the title is cleared before closing day so there is no need to insure against “title defects.”

In Iowa, homebuyers receive an “abstract,” which lists the extensive history of the title of a piece of real estate. Your job is to hire a real estate attorney whose job is to provide a “title opinion” and help you decide whether there are any problems with the property’s title that need to be addressed before closing. They’ll give you the green light on whether you have a “clear title” or flag any issues that need to be clarified.

If you’re buying a home with the help of a mortgage, getting a title opinion will be a mandatory step before your lender issues your funding. As you can tell, this is a make-or-break step in the homebuying process.

Attorney Fees

There are 20 states where it’s mandatory to hire a real estate attorney when you buy a home, but Iowa is not on that list. Still, you may want to enlist the wisdom of a real estate lawyer to help you with such a large purchase. An attorney can help with drafting your purchase agreement, certifying deeds, and reviewing your home insurance and title insurance policies.

They’ll also do the heavy lifting with looking over your title abstract and deciding if you have a clear title or any red flags that you need to discuss with your seller before proceeding. While some homebuyers rely on their lender’s attorney to take responsibility for this step, having a second opinion with an attorney is often worth the peace of mind.

Your real estate agent or title company may also recommend that you hire a lawyer if your home purchase is a complex one, such as if you’re buying from outside of the state.

The cost for hiring a real estate attorney in Iowa will vary, depending on where you are in the state, what you need your lawyer to do, and the level of complexity. Some real estate lawyers charge by the hour while others charge a flat fee.

Iowa Real Estate Transfer Tax

Homebuyers in Iowa are about to get acquainted with a variety of taxes, starting with real estate transfer taxes. These are local and state government taxes that are paid when the seller transfers the property to the buyer. This expense can be listed as a deed tax, mortgage registry tax, or real estate conveyance tax.

The documentary tax stamp rate standard across Iowa is $0.80 per every $500, with the first $500 exempt. These are pretty low transfer taxes – in Florida, for example, homebuyers spend $0.70 for every $100 of the home’s purchase price.

In Iowa, the transfer tax or “documentary tax” is usually paid by the seller, but this isn’t a hard and fast rule. Both parties may negotiate other concessions: You could pay for this expense in order to ask your seller or builder for leeway on other costs, for example.

Property Taxes

Another tax Iowan homebuyers ought to get used to is property taxes. The median property tax in the Hawkeye State is $1,569 per year for a home worth about $122,400. Counties charge about 1.29 percent of a home’s assessed fair market value in property taxes each year.

This rate will fluctuate depending on the county you live in, though: Pocahontas County has some of the lowest property tax rates at 1.12 percent while Johnson County’s rates creep up to 1.64 percent.

For comparison’s sake, New Jersey has some of the nation’s highest property taxes at 2.49 percent. On a $217,500 home, you’d be paying $5,419 annually.

Count on paying for this expense prorated at closing, and then bi-annually at the start of September and at the start of March, so mark your due dates on your calendar.

Homeowner’s Insurance

Your lender will have a lengthy list of requirements you’ll need to fulfill before they transfer over your mortgage funds to buy your home. At the top of the list is often homeowner’s insurance. You must have your insurance policy in effect and paid for the upcoming year before you move in.

It’s an essential buy for your peace of mind, too. Homeowner’s insurance covers any physical damage to your home caused by fire, wind, vandalism or theft.

Do your homework on extra insurance policies you’ll need to tack on, especially if you’re in counties that are at risk of tornadoes, storm damage, or other extreme weather events. Building a storm shelter can help lower the cost of your insurance premiums

Like property taxes, homeowner’s insurance is a “prepaid expenses,” which means it needs to be paid for upfront on closing day and can’t be rolled into other financing.

Surveying Fee

Florida and Texas are the only states in which land surveys are mandatory for single-family homes, but with sprawling acres of land, you may want a survey for your potential new home in Iowa, too.

A surveyor is hired to establish the precise borders of your potential new home. Ideally, their work matches up with what you’ve been sold, but sometimes a survey may reveal that the property is larger or smaller than assumed.

Appraisal and Home Inspection

There are two other major checkpoints your lender will require you to clear before they process your home loan: the appraisal and the home inspection.

In both instances, your lender just needs to know that they’re lending you the cash for a solid, worthy investment.

First off, your lender will send a third-party appraiser to scope out your potential buy and make sure it’s priced at the right value. If you default on your mortgage and your lender needs to foreclose on your home, they need to know they can sell the property and recoup their costs.

The appraiser will scan the home’s size, features, condition, and how it stacks up to homes priced similarly in the community, to determine its fair market value.

Once you’re in the clear with this step, you’ll need to recruit a home inspector who will focus on the nuts and bolts of your home. They will scan everything from the foundation to the roof and share any concens.

Pay close attention to what your home inspector has to say: they could flag key issues that already exist or may surface in the coming years. With this intel, you could ask your seller to knock the price point or make repairs before finalizing the deal.

Whether it’s you, your lender, or your lawyer who insists on either of these steps, you’re responsible for the bill.

Private Mortgage Insurance

For most homebuyers – especially first-timers – private mortgage insurance (PMI) may be required. If you aren’t providing a 20 percent down payment, your lender will require you to purchase PMI in Iowa. PMI allows borrowers to qualify for a conventional loan even if you put five to 19.99 percent of your mortgage as a down payment.

To be clear, while you’re the one paying for the insurance, the coverage is for your lender; because you haven’t put down 20 percent, PMI protects your lender in case of loan default.

PMI typically ranges from 0.25 percent to as high as 2.25 percent of your outstanding loan balance, depending on the size of your down payment and credit score.

How Can I Lower My Closing Costs in Iowa?

If there’s a will, there’s a way. If you’re looking for ways to lower your overall closing costs bill, here’s a look at key strategies that could save you thousands of dollars:

Closing Cost Assistance

Making use of homeownership assistance programs in Iowa is the single most efficient way to make the biggest reduction in your closing costs bill.

The Iowa Finance Authority has a series of statewide assistance programs to help first-time and repeat homebuyers alike. If you qualify, you can secure 25- or 30-year fixed rate mortgages with interest rates that are typically lower than the market rate and have fewer fees. You can apply for down payment assistance grants or second mortgages of up to 5 percent of your home’s sales price to cover closing costs.

Check out local homeownership assistance programs, too. In the Cedar Rapids metro area, for example, eligible first-time homebuyers can apply for up to $15,000 in down payment and closing cost assistance.

Get Your Finances in Shape

Another way to dramatically lower your closing costs expenses is to get your personal finances in great condition, with a high credit score and savings in the bank.

Your mortgage is a debt you’ll be repaying for decades, so the interest rate you secure is pivotal. If you can show lenders you’re a responsible borrower, you could snag a lower interest rate and save thousands over the lifetime of your home loan.

And the closer you get to the 20 percent down payment threshold, the less you’ll have to cough up in private mortgage insurance.

Make sure your credit score is as high as possible, don’t skip any payments on your existing debts, and try to keep your debt-to-income ratio low before you make your case to lenders.

Comparison Shop

Take your time to comparison shop and obtain quotes from different providers, whether you’re shopping for the best interest rate on your mortgage or you’re looking for a qualified title company or real estate attorney.

Check out referrals from your lender, real estate agent, or title company, too. They could have go-to professionals on hand that they’ve approved with discounts for referrals.

However, don’t let price be the only decision-maker. Take stock of reviews from former clients to help determine which entity is best for you.

Seller Concessions

There are no concrete rules on who pays for which closing costs in Iowa. With this flexibility, there may be more room for negotiation when you’re dealing with your seller, especially if they’re trying to close the deal and you’re in a buyer’s market.

Buyers can ask sellers to pay for some – or all – of their closing costs. If the home you’re eyeing is priced at $250,000, you may submit a full price offer with a caveat that your seller covers all $3,000 of your closing costs, for example. You could ask your builder to pay your closing costs so you can, in turn, buy upgrades on a brand new home.

In other words, there are a handful of different scenarios you could try out to reassign some of the closing costs to your seller.

Negotiate Fees

Study your “Closing Disclosure” form closely – it outlines every service and fee you’ll pay for on closing day. Your job is to check for discrepancies, an increase in fees, or new, surprise charges. Don’t be afraid to question or push back on any disparities.

Consider your relationship with your lender, too. If you’re a repeat customer with a history of keeping up with loan repayments, you could ask your lender to omit certain expenses. The most obvious charges you can try for are fees that are often labeled as “junk fees,” such as rate lock fees, loan processing fees, and broker rebates.

You could also ask your lender to stagger these expenses, so they’re paid during the homebuying process in stages instead of all at once at closing.

Adding Closing Costs to Your Home Financing

If you don’t have the upfront cash to cover your closing cost expenses, you may be able to roll this cost into your home loan. This means you’re off the hook for paying for these expenses on closing day, but you’ll make up for it via monthly mortgage payments that will be a bit higher. Ultimately, you’re paying interest on the closing costs tacked onto your first mortgage.

Check with your lender to see if this option is available. Remember, not all closing costs can be included because some must be paid upfront, such as your property taxes and homeowner’s insurance.

No-Closing-Cost Mortgages

Some homebuyers can opt into a “no-closing-cost” mortgage as a strategy to keep this expense at a minimum. In this case, your lender agrees to pay for part or all your closing costs, but you in turn pay a higher interest rate.

Do the math before deciding this is the appropriate route for you. In the long run, this could cost you more money because of the bump in your interest rate but for some homeowners, it may be their best choice.