Small-town charms, spacious homelands, and a low cost of living. If you’re a homebuyer moving to South Dakota, you’re in luck: Along with affordable housing options, the state has some of the lowest closing costs in the country.
Homebuyers often fixate on saving for a down payment and securing a home loan but end up overlooking closing costs. However, they’re worth budgeting for. In a nutshell, closing costs are all the administrative and legal services you must pay before you receive the keys to your new home. It takes a village to help you buy property – there’s your lender, attorney, appraiser, home inspector, and the taxman, for starters. Instead of paying each service provider one by one, these expenses are cobbled together and paid on closing day alongside your down payment. All in, count on closing costs amounting to about two to five percent of a home’s purchase price.
If you’re buying a new home in South Dakota, NewHomeSource has put together the following guide on how much you should be saving for closing costs, a breakdown of what’s generally included, and how you can potentially lower them.
How Much are Closing Costs in South Dakota?
Closing costs in South Dakota run, on average, $1,828 for the average home loan of $160,902, according to a 2021 report by ClosingCorp, which provides research on the U.S. real estate industry. Those figures put South Dakota in the 6th spot among the 50 states for the least expensive closing costs. Overall, it’s safe to say closing costs are cheaper in the Midwest – Missouri, Indiana, Iowa, and Wisconsin are also among the top 10 states with the lowest closing costs. In Missouri, for example, the average is $1,290 for a home priced at $177,915; for comparison’s sake, the national average for closing costs is $6,087.
But homebuyers in South Dakota should plan on spending more than this initial estimate. ClosingCorp’s data excludes two major costs you’re bound to come across: loan origination fees if you need to take out a mortgage, and private mortgage insurance if you have a down payment of less than 20 percent. Both can add thousands to your closing costs tab.
While it has some of the most affordable housing in the country, closing costs have also crept up in South Dakota as the average sale price for a single-family home in the state is up to $238,700.
Also keep in mind that closing costs can fluctuate greatly depending on the price of your home, where it’s located, and the complexity of the sale.
What’s Typically Included in South Dakota’s Closing Costs?
The easiest way to keep track of your closing costs tab is to group your fees into three key categories: mortgage-related, property-related, and annual recurring expenses.
Each state also has its own set of regulations you’ll need to follow, from real estate transfer taxes to hiring an attorney. Here’s what to expect in South Dakota.
The following are the closing cost fees you’ll incur for securing a mortgage, including the protocol for hiring an attorney.
Loan Origination Fees
Whether you’re working with a bank or mortgage broker, one of the first expenses you’ll incur are loan origination fees to set up your mortgage application. This includes everything from underwriting your loan to providing preapproval letters for your house hunting to processing your funding.
Loan origination fees are typically about 0.5 to 1 percent of the loan amount.
Credit Report Fees
Before your lender offers you a home loan, they’ll need to conduct a full credit check to make sure you’re a responsible borrower. They’ll pull your credit report from the various credit reporting bureaus for an in-depth look at how you’ve managed debt.
Expect your lender to pass on the cost of requesting your credit report to you. If more than one borrower is listed on the mortgage application, separate checks will be done for each person.
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. The coverage protects your lender in case of loan default.
PMI typically ranges from 0.25 to 2.25 percent of your outstanding loan balance, depending on the size of your down payment and credit score.
While in some states it’s mandatory to hire a real estate attorney to manage your closing, this isn’t the case in South Dakota. You may still decide to enlist the help of a lawyer, especially if your home purchase is a complex one, such as if you’re buying from out of state, the property has physical damage, or you’re buying a foreclosed home.
You can rely on your attorney to help with the legal aspects of your home purchase such as drafting your purchase agreement, certifying deeds, and reviewing your title examination and title insurance policy. Attorney fees will vary, depending on where you are in the state and what you need your lawyer to do.
You may decide to hire a title company — or escrow agent — to help ensure you get to closing day on time, too. Your title company acts as a neutral third party, setting up an escrow account to hold your earnest money deposit, down payment, taxes, and other expenses. This way the seller won’t receive any funds until both parties meet all their conditions on the sale and the contract is finalized.
Before you can close on your new home, you’ll need to do your due diligence to make sure you’re buying a worthy investment. Here are some common property-related fees.
A key purchase in the homebuying process is the title examination. In this case, a title search involves reviewing historical documents such as deeds, court records, and property indexes to ensure the seller’s right to transfer ownership. The last thing you want is to buy a home only to inherit a legal issue 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.
Once the title search is complete, you’ll need to purchase two title insurance policies – an owner’s policy for you, and a lender’s policy. Title insurance protects both parties in case of “defects in title,” which is when something is missed during the title search or there are claims on the property. This is a one-time expense, so the insurance applies for as long as you’re the homeowner of the property.
Another checkpoint you’ll need to clear before your lender agrees to fund your home loan is the appraisal. Your lender will send a third-party appraiser to your new home to make sure it’s priced at the right value. If you default on your mortgage, your lender needs to know they can sell the property if it goes into foreclosure to make up the outstanding balance.
The appraiser’s job is to evaluate the home’s size and condition and compare how it stacks up to similarly priced homes in the community. While your lender calls the shots on who the appraiser is, you are billed for this expense.
Hire a professional home inspector to evaluate the health and safety of your potential new home, from the foundation to the roof and everything in between. Pay close attention to your home inspector’s feedback. They will point out any existing issues as well as ones that could surface in the coming years, such as needing to replace major appliances or an aging roof. This is great intel you can use to negotiate with the seller regarding any fixes before finalizing the deal.
Real Estate Transfer Tax
Transfer taxes are local and state government taxes that are paid as the seller transfers the home to the buyer. They could be listed as a deed tax or stamp tax on your closing costs bill.
In South Dakota, the transfer tax rate is $0.50 for every $500 of property value. Sellers usually pay for transfer taxes, but this isn’t set in stone. The buyer and seller may allocate this expense to the buyer during negotiations.
There are some exceptions if you’re transferring property between spouses, from divorce, or gifting property, for example.
You’ve got your mortgage, utility bills, property taxes – homeownership is all about managing recurring expenses. The annual fees start cropping up with these closing cost expenses:
In South Dakota, property taxes average roughly 1.22 percent of a property’s assessed fair market value, according to the tax policy non-profit Tax Foundation. The rate will vary depending on the county where you live.
Property taxes are a prepaid expense, meaning they can’t be rolled into your home financing.
Home insurance is a mandatory purchase you must make before your lender agrees to transfer your home loan. This is another prepaid expense. It’s crucial to have your home insurance policy in effect by the time you take ownership because it covers any physical damage to your home caused by fire, wind, vandalism, or theft.
You may need to buy additional policies if you have expensive art or family heirlooms you’ll keep in your home.
How Can I Lower My Closing Costs in South Dakota?
Between saving for a down payment and new furniture, you may be looking for ways to lower your closing costs. Here are some key strategies to consider.
Closing Cost Assistance
Homebuyers should take advantage of South Dakota’s homeownership assistance programs to put a significant dent in their closing costs.
If you’re a first-time homebuyer, for example, start with the South Dakota Housing Development Authority. It has several down payment and closing cost assistance programs for eligible first-time homebuyers. Don’t forget to look into regional homeownership programs, too.
Get Your Finances in Shape
Before you shop for a home loan, square away your finances. This strategy could help you secure a lower interest rate, which would save you thousands in interest over the lifetime of your mortgage. Pay off your debts, don’t miss any payments on your bills, and steer clear of applying for more credit.
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.
Don’t scoop up the first deal you see, whether you’re shopping for a home loan, a home inspector, or a title company. Shop around, obtain quotes from service providers, and take stock of referrals from your real estate agent, family, and friends. Comparison shopping will help you secure the best deal for your specific needs.
During negotiations on the home sale, you may be able to reassign some of your closing costs to the seller, especially if you’re in a buyer’s market.
You could, for example, ask the seller to pay for some of your closing costs if you offer to submit a full-price offer on their home.
With a “no-closing-cost” mortgage, your lender agrees to pay part or all of your closing costs while you 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 to your interest rate.
Adding 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. While this may be a convenient way around paying for closing costs upfront, you’ll pay interest across the life of the loan, so be sure this is an acceptable trade-off.
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.