The Complete Guide to Closing Costs in Texas

A booming economy, stunning landscapes with some of the safest cities in the country, the best places to live and incredible music, culture, and food that draws in tourists from around the world – well, there’s a lot to love about Texas. If you’re a homebuyer ready to call the Lone Star State home, you may be wondering how much closing costs are in Texas.

Alongside your down payment, closing costs are another crucial expense that are paid for on closing day before you get the keys to your new home. In a nutshell, closing costs encompass all the fees incurred during your homebuying journey. You’ve got your lender, property appraiser, home inspector, insurance provider, and the taxman, just to name a few. Instead of paying for each cost one by one, these expenses are grouped together and labeled as closing costs. They can add up quickly, typically amounting to 2 to 5 percent of your home’s purchase price.

If you’re buying a new home in Texas, here’s a guide on how much you should be saving for closing costs, a breakdown of what’s generally included, and ways to potentially lower these costs.

How Much are Closing Costs in Texas?

Let’s be honest: closing costs are a pretty penny in Texas. It’s typically $3,494 for a home loan of $213,334, according to a 2021 report by ClosingCorp, which provides research on the U.S. real estate industry. That number makes up 1.64 percent of the home’s price tag.

Texas ranks 8^th for the most expensive closing costs across the nation, just behind the likes of Hawaii, Florida, New Jersey, Pennsylvania, and New York. For comparison’s sake, Missouri has the country’s cheapest closing costs at just $1,290 while New York has the most expensive at $8,256. The national average is $6,087.

But homebuyers in the Lone Star State should count on spending more than ClosingCorp’s initial estimates. That’s because its data excludes 2 key expenses: loan origination fees if you’re taking out a mortgage, which most homebuyers usually choose to do, and private mortgage insurance if you’re not applying a 20 percent down payment. Both these costs add thousands to your closing costs bill.

Closing costs can fluctuate depending on the price of the home and the complexity of the home sale, too.

And keep in mind that home values have increased in Texas: in the third quarter of 2021, the average sale price for single-family homes in the state, for example, sat at $310,000, up 16.9 percent from the year before, according to research from the Texas Realtors Association. Across the state, from El Paso to Corpus Christi to Dallas, the association found home prices increased year-over-year. In Austin, for example, home prices shot up 32.9 percent, yielding median price tags of $465,000 in 2021.

What’s Typically Included in Texas’ Closing Costs?

With a lengthy list of expenses to account for, the easiest way to tally up your closing costs is to group them into 3 fee categories: mortgage-related fees, property-related fees, and annual recurring fees.

Here’s a closer look at the more common charges you’ll encounter in Texas, including the state-specific details of which every homebuyer should be aware.

Mortgage-Related Fees

Unless you have the cold hard cash to buy your dream home, your first stop in the homebuying process will be to a lender to apply for a mortgage. These are some of the lender fees you might need to pay, along with state protocol for hiring an attorney.

Loan Origination Fees

Right off the bat, you’ll be charged about 0.5 percent to 1 percent of your total mortgage to set up your home loan. A mortgage doesn’t come for free – your lender will charge you this fee for all the paperwork involved in preparing your home loan. This includes the application, underwriting, providing preapproval letters, processing the funding at closing, and more.

Credit Report Fee

To help your lender determine if you’re a responsible borrower, they’ll pull your credit score from the various credit reporting bureaus to get a clear snapshot of how you’ve historically managed your debts. This is commonplace whether you’re applying for a mortgage, credit card, car loan, or other forms of credit.

Expect your lender to pass on the cost of requesting your credit report to you. If more than one borrower is involved in the mortgage application, you’ll need to double this cost.

Private Mortgage Insurance

If you aren’t providing a 20 percent down payment, your lender will expect you to buy private mortgage insurance, or PMI. PMI allows borrowers to qualify for a conventional loan if they put down 5 to 19.99 percent of their mortgage.  While you’re responsible for paying for the insurance, the coverage is for 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 your credit score.

Attorney Fees

In some states, you must hire a real estate attorney to help you with your home purchase. While this isn’t a mandatory clause in Texas, you may still decide to hire a lawyer to deal with the legal aspects of your closing. You can count on your lawyer to help with drafting your purchase agreement, certifying deeds, reviewing your title search, and choosing iron-clad insurance policies, as prime examples.

Your real estate agent may even recommend that you recruit a lawyer if your home purchase is a complex one, such as if you’re buying from out of state.

Escrow Fees

In Texas, title companies and escrow agents typically conduct closings. You may decide to recruit their help to make sure you get to closing day on time and without any hiccups along the way.

Your title company will be responsible for setting up a neutral third-party escrow account to hold onto your funds, from your earnest money deposit to your payment for property taxes, insurance, and other services. This way, your seller and other vendors won’t receive any funds until both parties have met all their obligations for the home sale.

You can also rely on your title company to guide you through the checklist of things you need to have completed by closing.

Property-Related Fees

From the title search to the appraisal, these property-related fees are pivotal checkpoints in the homebuying process that you’ll need to clear before proceeding.

Title Search

A key purchase in the homebuying process is the title examination. In this case, a title search involves reviewing historical records like deeds, court records, property indexes, and other record-keeping to ensure the seller’s right to transfer ownership.

The last thing you want is to buy a home only to be on the hook for any legal issues over ownership or other problems like unpaid taxes, judgments, or ongoing lawsuits.

You’ll need to pay for this step whether you’re buying a brand-new build or an existing home.

Title Insurance

Once the title search is conducted and signed off on, you’ll need to purchase 2 title insurance policies – an owner’s policy for you, and a lender’s policy. Keep in mind, the Texas Department of Insurance says that an owner’s policy isn’t required but the lender’s policy – called a Loan Policy of Title Insurance – is essential.

The department says that title insurance protects against any financial loss caused by “defects in title,” which is when something is missed during the title search and there are claims on the property. Your insurance will kick in to defend against lawsuits, or in the case of a covered loss, it’ll reimburse you or your lender up to the insured policy limit.

Unlike other insurance premiums that need to be paid annually, title insurance is a one-time expense. The lender’s policy is in effect until your loan is paid off and the owner’s policy lasts as long as you own the land.

Here’s some good news: Title insurance rates in Texas are regulated so all title companies will charge the same premiums. Rates are based on your property’s sale value – the basic premium for a $100,000 property is $832, according to the state insurance department.

Appraisal

A pivotal checkpoint your potential new home will need to clear is the property appraisal. In this case, your lender will send a third-party appraiser to assess the property and make sure it’s priced at the right market value. Essentially, they need to know that if you default on your mortgage, they can sell the property to recoup their losses.

The appraiser will scan the home, its size, key features, and condition, then compare how it stacks up to similarly priced homes in the neighborhood. While your lender delegates this step, you’re going to foot the bill.

Home Inspection

While an appraiser evaluates whether your new home has the right price tag, you’ll also need to hire a home inspector whose job is to check on the health and safety of your potential new home.

This step is worth every penny. Your home inspector will take stock of your home’s overall condition and the minute details, from the roof to the foundation, major appliances to drainage systems, and heating and ventilation.

Take notes when your inspector provides feedback – they will flag any issues and repairs you may be inheriting now or down the road. You can bring this intel back to your seller for further negotiations before finalizing the deal.

Real Estate Transfer Tax

There’s another silver lining for Texan homebuyers: no real estate transfer taxes! Whenever real estate changes hands, usually 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.  This closing cost fee is non-existent in the Lone Star State.

Skipping out on this step will save you hundreds, if not thousands, of dollars.

Annual Fees

Monthly mortgage payments, utilities, property taxes – homeownership doesn’t come cheap, and the recurring bills will start with your closing costs. Pay attention to these annual fees you’ll need to start paying on closing day.

Property Taxes

In Texas, homeowners pay an average of 1.66 percent of their property’s assessed market value, according to the Tax Foundation, a decades-old tax policy non-profit. Texas has no state property tax, so this tax is paid directly to the county you live in to pay for schools, streets, roads, police, fire protection, and other services.

Still, the Lone Star State has one of the highest average property tax rates in the country.

Homeowner’s Insurance

Alongside PMI and an appraisal, your lender will also insist that you take out and pay for a robust homeowner’s insurance policy. By closing, it must be paid for and in effect.

Home insurance is a crucial purchase because it covers any physical damage to your home caused by fire, wind, vandalism, or theft. It’s giving your lender peace of mind, but it should do the same for you, too.

You’ll also need to decide if you want to add coverage for expensive heirlooms, artwork, and jewelry.

HOA Fees

About 33 percent of Texan homeowners live in homeowners’ association communities. With those stats, there’s a good chance you’ll need to factor in prorated HOA dues at closing, too.

HOA fees cover the cost of clubhouses, pools, community parks, fitness centers, trash removal, security, and fire alarm systems. If your HOA has more bells and whistles, you should expect to pay even more.

If you’re eyeing a property, ask about HOA fees upfront so you know what you’re getting in return for this cost. The onus is on you to keep up with payments according to the fee schedule.

How Can I Lower My Closing Costs in Texas?

While you’re saving for a down payment, new furniture, and hiring movers, the last thing you want to worry about is covering closing costs. If you’re looking for ways to offset this expense, here’s a rundown of key strategies worth trying out.

Closing Cost Assistance

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

If you’re a first-time homebuyer, start with the statewide My First Texas Home Program – it can help with your down payment, closing costs, and home loan expenses. There are also programs for homebuyers who are public school teachers, nurses, librarians, first responders, veterans, and active military.

Check out local homeownership assistance programs, too – from Abilene and Austin to Dallas and Houston, there are programs that offer closing cost assistance up for grabs.

Get Your Credit Score and Finances in Shape

A key strategy before you start shopping for a home loan is to get your credit score in great shape. That’s because the interest rate you secure is critical – with a great credit score, you could secure a lower interest rate. This move can save you thousands of dollars over the lifetime of your mortgage.

Save as much as you can for your down payment, too. The closer you get to the 20 percent down payment threshold, the less you’ll have to pay in PMI.

Comparison Shop

Whether you’re shopping for a title company, a home inspector, or a mortgage provider, shop around and compare prices between service providers. Read through reviews, check out referrals from friends and family, and look at providers’ accreditations. With a shortlist in hand, obtain quotes from a few providers to make sure you’re getting the best deal.

Seller Concessions

Don’t shy away from negotiating who pays for what with your seller, especially if you’re in a buyer’s market where the seller is eager to make the sale.

You may be able to reassign some of the closing costs to the seller. For example, you could ask the seller to pay for some — or all — of your closing costs if you offer to submit a full-price offer on their home. If you’re building a new construction home, you could ask your builder to pick up your closing costs tab in exchange for paying for certain upgrades throughout your home.

No-Closing-Cost Mortgages

With a “no-closing-cost” mortgage, your lender agrees to pay for part, or all, of your closing costs. The trade-off? You must pay a higher interest rate on your mortgage.

Run some calculations before you decide that this is the best route for your bottom line. In the long run, this could cost you more money because of the bump in your interest rate.

Add Closing Costs to Your Home Financing

Homebuyers who can’t come up with the cash for their closing costs may opt to roll this expense into their home loan. This way, instead of paying for their closing costs on closing day, the total is added to the monthly mortgage payments. While this is a convenient way around paying for closing costs up front, you’re left paying interest on your closing costs across the life of the loan.

This option isn’t necessarily available to all homebuyers. You’ll need to check with your lender to see if they can accommodate this arrangement.