Are you thinking of buying a home in Kentucky? It’s got a low cost of living, fierce sports team rivalries, and the perfect mix of safe, quiet suburbs and busy cities like Lexington and Louisville, making Kentucky an ideal place to retire. Among the many reasons why it’s a good idea to move to the Bluegrass State are the closing costs, which are some of the lowest in the country. And with programs for first-time homebuyers in Kentucky, you could potentially save even more.
Closing costs cover all the fees homebuyers must pay on closing day when they purchase a new home, including loan- and service-related fees. They generally amount to 2 percent to 5 percent of the home’s purchase price.
Closing costs vary by state, so here’s a closer look at what you can expect to pay in Kentucky, what’s typically included, and how you can potentially lower these costs.
How Much Are Closing Costs in Kentucky?
If you’re buying a home in Kentucky, here’s some great news: It ranks ninth for the country’s lowest closing costs behind states like Alabama, Wisconsin, and Indiana. Closing costs in Kentucky average $1,887 for a home priced at $147,358, according to a 2021 report by ClosingCorp, which provides research on the U.S. real estate industry. That price tag makes up 1.28 percent of the home’s price tag. The national average is $6,087.
But Kentucky homebuyers should prepare to spend far more than this estimate. ClosingCorp’s data excludes a handful of key expenses, including loan origination fees and private mortgage insurance, which could add thousands to your closing costs bill.
Closing costs fluctuate depending on your home’s price and the complexity of the sale, and home values have increased in Kentucky. Kentucky Realtors reported in August 2021 that the median sales price for a home was $220,000, up 10 percent from the year before. If you are aiming to earmark 2 percent to 5 percent of your home’s purchase price, you could be looking at closing costs ranging from $4,400 to $11,000 based on the updated price point.
What’s Typically Included in Kentucky Closing Costs?
Closing costs can be grouped into three categories: property-related fees, mortgage-related fees and annual fees. Each state also has its own set of regulations you’ll need to follow, such as applying real estate transfer taxes or hiring a real estate attorney to help with the closing process.
Here’s what to expect for Kentucky:
Loan Origination Fees
When you take out a mortgage to help purchase your home, you’ll incur a loan origination fee for setting up the loan. The lender is charging you a fee to apply for and open a mortgage account. That includes everything from setting up your home loan application, conducting a thorough underwrite, preparing preapproval letters for your house hunting and processing your funding at closing. These fees are roughly 0.5 percent to 1 percent of your loan amount.
Credit Report Fee
The lender will also do a thorough credit check to make sure you’re a responsible borrower. Part of this includes pulling your credit report to look at how you’ve managed your existing debts. The lender will bill you for the full cost of requesting your credit report. If there are two names on the mortgage, double this cost because the lender will pull both applicants’ reports.
Private Mortgage Insurance
Homebuyers that aren’t providing a 20 percent down payment will likely need to pay for private mortgage insurance, or PMI, to qualify for a conventional loan. While the homebuyer is the one paying for the insurance, the coverage protects the lender in case of loan default. Once the owner pays off 20 percent of the home, they can apply to eliminate this coverage.
PMI typically ranges from 0.25 percent to 2.25 percent of the outstanding loan balance, depending on the size of the buyer’s down payment and credit score.
In Kentucky, it’s mandatory to hire a real estate attorney to conduct the closing. The attorney prepares all of the closing documents and will be on hand on closing day for the transfer of deed. The cost for hiring a real estate attorney in Kentucky will vary, depending on how complicated your home sale is. Some lawyers may charge by the hour while others could charge a fixed retainer fee for looking after your home purchase.
You may decide to hire a title company or escrow agent to ensure you get to closing day on time without any hiccups. The title company will set up a neutral third-party escrow account to hold onto your funds, such as your earnest money deposit and payments for property taxes and homeowner’s insurance. The seller (and the various vendors you’ve hired to help with your home purchase) won’t receive any funds until you and the seller have met all the conditions on the home sale.
In Kentucky, the buyer typically shoulders this expense, but in some cases, it can also be shared with the seller.
The attorney looking after your closing will order a title search, which reviews historical records like deeds, court records, property and name indexes and other record-keeping to ensure the seller has the right to transfer ownership of the home to you.
A title search will also check that the property has no outstanding ownership disputes, unpaid taxes, judgments or lawsuits in progress.
Once the title search is complete, you’ll need to follow up the results with a title insurance policy. This insurance protects you and the lender in case something was overlooked during the title search.
The title insurance covers you, including paying for all court costs and related fees, should something go awry. You will need to buy an owner’s title insurance policy and a lender’s title insurance policy. Who pays for these policies between buyer and seller may differ, so it’s best to ask for guidance from your closing attorney or title company.
Before the lender issues your mortgage, they’ll send a third-party appraiser to evaluate your potential new home and ensure it is priced at the right value — and as the buyer, you’ll cover this fee. The appraiser will scan the home, its size, its features, its condition, and how it stacks up to similarly priced homes in the community, to determine its fair market value. That way, if you default on your mortgage, the lender knows it can recoup its costs if they need to foreclose and put the property up for sale.
A home inspector will scan your potential new home from the foundation to the roof. They could flag existing issues or ones that may surface in the coming years. With this intel, you could ask your seller to knock the price point down to factor in or make repairs before finalizing the deal.
Whether you, your lender or your lawyer insists on this step, you’re responsible for the bill. Again, count on this cost to vary depending on where you live in the state and the size of your home.
Real Estate Transfer Tax
Whenever real estate changes hands, buyers and sellers need to account for a real estate transfer tax as part of their closing costs. Sometimes it’s called a deed tax, a mortgage registry tax or a documentary stamp tax.
In Kentucky, this tax runs $0.50 for every $500 of the home’s purchase price. A home priced at $200,000 would come with a transfer tax of $200, for example.
The transfer tax is usually paid by the seller in this state. But this isn’t a hard and fast rule as both parties may negotiate other concessions. You could pay for this expense to ask your seller for leeway on other costs, for example.
Your first six months to a year of property taxes will need to be collected with your other closing costs. This is a prepaid expense, meaning it needs to be paid for in cash at closing and can’t be rolled into your home financing.
In Kentucky, state property taxes will cost homeowners 11.9 cents for every $100 of a home’s assessed market value. Each county also determines its local tax rate. You’ll pay for property taxes annually and can expect to receive your tax bill starting in September, depending on which county you live in.
Before the lender issues your funding, you’ll need to have homeowner’s insurance paid for and in full effect for the upcoming year at closing. It will be a recurring annual cost, just like your property taxes.
A homeowner’s insurance policy is an essential buy for your peace of mind. It’ll cover any physical damage to your home caused by fire, wind, vandalism or theft. Do your homework on whether you may need any extra insurance policies as well.
Homeowners Association Fees
About 16 percent of homeowners in Kentucky are members of a homeowners association so you may have to factor HOA fees into your closing costs.
HOA fees cover the cost of clubhouses, pools, community parks, fitness centers, trash removal, security, and fire alarm systems for a particular subdivision. If your HOA has more bells and whistles, you should expect to pay more. These fees also tend to rise in communities with aging buildings as more maintenance is required.
The seller will cover outstanding HOA fees, then pass the torch to you to cover this annual expense. If you’re eyeing a property, ask about HOA fees upfront so you know what you’re getting for this cost.
How Can I Lower My Closing Costs in Kentucky?
If you’re looking for ways to lower your overall closing costs bill, here’s are some key strategies that could save you money.
Closing Cost Assistance
Making use of homeownership assistance programs in Kentucky is the single most efficient way to reduce your closing costs. The Kentucky Housing Corporation, for example, has a down payment assistance program that provides first-time homebuyers with down payment and closing cost assistance in the form of a loan of up to $6,000. Look into local homeownership assistance programs, too. Lexington, Louisville and Owensboro all offer programs worth checking out.
Get Your Finances in Shape
The interest rate you secure on your mortgage is a crucial moment in the homebuying process. You’ll be paying your home loan off for the next few decades, after all. By improving your credit score, you can show lenders you’re a responsible borrower and have a better chance at obtaining a low interest rate, which will save you thousands of dollars over the lifetime of your loan.
Save as much as you can to apply toward your down payment too. The closer you get to the 20 percent down payment threshold, the less you’ll have to pay in private mortgage insurance.
Choose your service providers wisely, whether you’re shopping for a title company, a home inspector or a homeowners insurance policy. Read reviews from previous customers, ensure your service providers are appropriately accredited, and then look at price points so you know you’re getting the best deal.
Some title companies or lenders have a list of go-to professionals on hand that they’ve approved. Using their referrals may come with steep discounts.
With no hard and fast rules on who pays for what, there is always wiggle room when you’re negotiating with your seller on closing costs — unless you’re in a seller’s market.
It’s common to work with the seller to compromise on who pays for what. If you’re buying a new construction home but need to pay for upgrades, you may be able to work out a deal with your builder to pay your closing costs. If you’re buying an existing home, ask the seller to cover portions of your closing costs to pay for any necessary repairs.
When you receive your closing paperwork, carefully read the Closing Disclosure form to grasp what fees and services you are being asked to pay. As closing day approaches, make sure there aren’t additional charges or an increase in fees that you didn’t agree to.
If you have a longstanding, established relationship with your lender, you could ask them to omit certain expenses from the final bill, such as rate lock fees, loan processing fees and broker rebates. You could also ask to stagger these expenses so they’re paid throughout the homebuying process 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.
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 of your closing costs, but you in turn pay a higher interest rate.
Do the math on this scenario before you opt for this route. In the long run, it could cost you more money because of the bump in your interest rate.
Carmen Chai is an award-winning Canadian journalist who has lived and reported from major cities such as Vancouver, Toronto, London and Paris. For NewHomeSource, Carmen covers a variety of topics, including insurance, mortgages, and more.