Closing costs explained
Closing costs are the loan costs and other costs paid to complete a mortgage, on top of the down payment. Federal rules set where they appear, when you see them, and how much an estimate is allowed to change. This page explains those rules; it doesn’t estimate what your costs will be.
This is general education, not legal or financial advice. Your Loan Estimate and Closing Disclosure show your actual figures. Ask your lender or settlement agent about any line you don’t understand.
The two forms: Loan Estimate and Closing Disclosure
- Loan Estimate: the lender must deliver or mail it no later than the third business day after it receives your application.Source: 12 CFR 1026.19(e)(1)(iii) and (e)(3) (Regulation Z: Loan Estimate timing and good-faith tolerances) · checked Nov 10, 2026
- Closing Disclosure: the lender must make sure you receive it no later than three business days before consummation, so you can compare the final figures with the Loan Estimate.Source: 12 CFR 1026.19 (Regulation Z, Closing Disclosure timing) · checked Nov 10, 2026
Initial vs. final Closing Disclosures, how the 3 business days are counted, the changes that restart the wait, and a checklist for comparing the two forms: Loan Estimate vs. Closing Disclosure.
Where closing costs appear on the Loan Estimate
The Loan Estimate groups closing costs under “Closing Cost Details” in lettered sections. The closing cost calculator uses the same groups.
| Section | What goes there |
|---|---|
| A. Origination Charges | Amounts paid to the lender and loan originator for originating the loan. Points paid to lower the rate are shown separately, as a percent of the loan amount and in dollars (see rate buydowns and discount points). |
| B. Services You Cannot Shop For | Settlement services from companies other than the lender or broker that you can’t choose yourself. |
| C. Services You Can Shop For | Settlement services from companies other than the lender or broker that you are allowed to choose. |
| D. Total Loan Costs | A + B + C. |
| E. Taxes and Other Government Fees | Recording fees and other taxes on one line; transfer taxes you pay on another. |
| F. Prepaids | Amounts paid in advance of the first scheduled payment: homeowner’s insurance premium, mortgage insurance premium, prepaid interest (per day × days), and property taxes, each with the months or days covered. |
| G. Initial Escrow Payment at Closing | Amounts placed into the escrow account at closing for recurring charges such as homeowner’s insurance, mortgage insurance, and property taxes (per month × months). |
| H. Other | Other amounts you are likely to pay or have agreed to pay at closing; optional products are labeled “(optional).” |
| I. Total Other Costs | E + F + G + H. |
| J. Total Closing Costs | D + I, minus any lender credits. |
Title search and title insurance fees usually appear in Section B or C, and an owner’s title policy in Section H. See Title, liens, and inspections.
Cash to close on the Loan Estimate starts from total closing costs, subtracts closing costs paid from the loan amount, adds the down payment, and subtracts the deposit (earnest money), seller credits, and adjustments and other credits.Source: 12 CFR 1026.37(f), (g), and (h) (Regulation Z: Loan Estimate closing cost details and cash to close) · checked Nov 10, 2026
How much the estimate can change
Regulation Z treats an estimate as made in good faith only if the final charge stays within its tolerance category. There are three categories:
| Category | Which charges | Rule |
|---|---|---|
| Zero tolerance | The general rule: every charge not in the other two categories. | The charge you pay can’t exceed the amount on the Loan Estimate. |
| 10% cumulative | Third-party services and recording fees, when the service isn’t paid to the lender or its affiliate and the lender lets you shop for it. | The total of these charges can’t exceed the total on the Loan Estimate by more than 10 percent. |
| No set limit (good faith) | Prepaid interest; property insurance premiums; amounts placed into escrow; services from providers you chose who aren’t on the lender’s list; property taxes and other third-party services the lender doesn’t require. | The estimate must be based on the best information reasonably available when it was given, even if the final amount is higher. |
A lender can use a revised estimate for these comparisons in specific cases, including changed circumstances, changes you request, and a rate that wasn’t locked when the first estimate was given.
Source: 12 CFR 1026.19(e)(1)(iii) and (e)(3) (Regulation Z: Loan Estimate timing and good-faith tolerances) · checked Nov 10, 2026Prepaids vs. initial escrow deposits
Both appear in “Other Costs,” but they pay for different things:
- Prepaids (section F) are charges paid at closing in advance of the first scheduled payment, such as the first homeowner’s insurance premium and interest from closing to the end of the month.Source: 12 CFR 1026.37(f), (g), and (h) (Regulation Z: Loan Estimate closing cost details and cash to close) · checked Nov 10, 2026
- The initial escrow payment (section G) is money placed into the escrow account at closing so the servicer can pay future tax and insurance bills.Source: 12 CFR 1026.37(f), (g), and (h) (Regulation Z: Loan Estimate closing cost details and cash to close) · checked Nov 10, 2026
- Escrow rules limit the cushion a servicer may hold to one-sixth of the estimated annual escrow payments.Source: 12 CFR 1024.17 (Regulation X, escrow accounts) · checked Nov 10, 2026
Prepaid interest, insurance premiums, and escrow amounts are in the “no set limit” tolerance category above, so they can change between the Loan Estimate and closing.Source: 12 CFR 1026.19(e)(1)(iii) and (e)(3) (Regulation Z: Loan Estimate timing and good-faith tolerances) · checked Nov 10, 2026
Program upfront fees
- FHA: upfront mortgage insurance premium of 1.75% of the base loan amount, which can be added to the loan.Source: HUD Handbook 4000.1, Appendix 1.0 – Mortgage Insurance Premiums (03/20/2023) · checked Nov 9, 2026
- VA: a one-time funding fee based on the down payment and whether this is a first or later use; some veterans are exempt. See the table on Mortgage insurance explained.Source: VA: “VA funding fee and loan closing costs” (page updated Oct 5, 2026) · checked Nov 10, 2026
- USDA: an upfront guarantee fee of 1.00% for fiscal year 2027.Source: USDA Rural Development: “Fiscal Year 2027 Conditional Commitment Notice” (Sep 16, 2026) · checked Nov 9, 2026 USDA’s maximum loan amount can include the upfront guarantee fee.Source: 7 CFR 3555.103, Maximum loan amount (eCFR, current) · checked Nov 9, 2026
When an upfront fee is added to the loan, the Loan Estimate shows it as closing costs “Paid from your Loan Amount,” so it isn’t part of the cash you bring.Source: 12 CFR 1026.37(f), (g), and (h) (Regulation Z: Loan Estimate closing cost details and cash to close) · checked Nov 10, 2026
Seller and interested-party contribution limits
Sellers, builders, and other interested parties can pay some of the buyer’s costs, but each program limits how much.
| Program | Limit | Source |
|---|---|---|
| Fannie Mae | Based on the lower of the sales price or appraised value: 3% when LTV/CLTV is over 90%; 6% at 75.01–90%; 9% at 75% or less (principal residence or second home); 2% for investment properties. Customary seller-paid fees under local custom aren’t counted, and financing concessions can’t exceed the borrower’s closing costs. | Source: Fannie Mae Selling Guide B3-4.1-02, Interested Party Contributions (IPCs) (05/07/2025) · checked Nov 10, 2026 |
| FHA | Up to 6% of the sales price toward origination fees, other closing costs, prepaid items, and discount points. The 6% also covers interested-party payments of the upfront premium and rate buydowns (see rate buydowns). | Source: HUD Handbook 4000.1, II.A.4 (interested party contributions) · checked Nov 10, 2026 |
| VA | VA doesn’t limit credits for the loan’s closing costs, but limits seller concessions to no more than 4% of the home’s reasonable value (shown on the VA Notice of Value). Concessions include credits for the VA funding fee, debt payoff, or prepaying the buyer’s hazard insurance. | Source: VA: “VA funding fee and loan closing costs” (page updated Oct 5, 2026) · checked Nov 10, 2026 |
| USDA | Seller and other interested-party contributions are limited to 6% of the sales price. Lender-paid costs through premium pricing and seller funds for repairs or the buyer’s real estate commission don’t count toward it. | Source: USDA Handbook HB-1-3555, Chapter 6 (rev 05-05-25), paragraph 6.2 C, Interested Party Concessions · checked Nov 9, 2026 |
Compare a seller credit with these limits in the closing cost calculator.
Guidelines change; confirm with a licensed lender.