Understanding Closing Costs in Texas: A Smart Buyer's Guide

When buying a home, most people focus on the down payment, which is often the biggest hurdle to home ownership. But closing costs can catch buyers off guard, especially when they total thousands of dollars. These one-time expenses can add up quickly and vary depending on your loan type, location, and lender. Understanding them is essential to being financially prepared.

This guide breaks down the common components of closing costs, how they change depending on your situation, and what you can do to reduce them.

What Are Closing Costs?

Closing costs are the various fees and expenses you pay when you finalize your mortgage and take ownership of the home. They typically range from 2% to 5% of the home’s purchase price (on top of the down payment). Thankfully, if you are looking for a conventional loan in Texas, they are closer to 2% than 5% because Texas doesn’t have many of the fees that states like Florida and New York have, but if you’re looking for FHA, VA or Non-QM financing, the fees can be higher.

These costs include lender fees, title and legal services, prepaid expenses like taxes and insurance, and third-party charges such as appraisals and inspections.

Typical Closing Costs (With Estimates)

When Certain Fees Apply

Not every fee applies to every buyer. Here's how your situation might impact closing costs:

Loan Type:

• FHA loans include an upfront mortgage insurance premium (UFMIP), typically 1.75% of the base loan amount. This is often financed into the loan, which increases your loan balance and monthly payment. FHA loans also require monthly mortgage insurance for the life of the loan with less than 10% down, making them more expensive than they appear. With a 10% or larger down payment on an FHA loan, you’ll pay monthly MIP for the first 11 years. With less than 10%, monthly MIP lasts the entire loan term.
• VA loans have a funding fee that can also be financed, but this fee is waived if the borrower meets certain criteria. You can check out our article on VA loans for more details.
• Conventional loans may require private mortgage insurance (PMI) if the down payment is less than 20% until the borrower reaches 22% equity in the home.

Appraisal Waivers:

• Buyers with large down payments and excellent credit may qualify for appraisal waivers depending on the property type.

State Requirements:

• In Texas, there are no state transfer taxes – a big win for homebuyers.
• Attorney fees can be thousands of dollars in other states but are typically only used for document preparation and average around $150.

Understanding Prepaids, Escrows, and Tax Prorations

Many buyers confuse closing costs with prepaids. These are not lender fees, but costs paid upfront to cover property taxes and homeowners insurance. Cash will be required at closing to cover prepaids, however you’ll receive the benefit of those costs over a period of time after closing.

Property Taxes: How much you pay at closing (or even how much you are reimbursed for) depends on when you close during the year. In most cases, the seller provides a prorated credit to the buyer for the time they owned the home. This reimburses the buyer because they will ultimately pay the full tax bill later in the year. Buyers also typically escrow 6 to 12 months of taxes upfront, which is held by the lender to pay the next tax bill on the borrower's behalf.

Homeowners Insurance: You’ll pay for 12 months of coverage upfront to activate the policy and receive coverage for the upcoming year. Then, lenders usually require 2 to 3 months of additional premiums to be collected at closing and held in escrow. This ensures there are enough funds available when the next premium comes due in case of a large increase in the premium. You should always shop your insurance annually.

Why It Can Feel Like You're Paying Twice: Because you pay one year upfront and start building an escrow reserve for the following year, it may seem like you're paying for insurance twice. The same applies to property taxes, where you're reimbursing the seller and simultaneously funding your escrow.

How to Reduce Your Closing Costs

There are several effective ways to bring down the amount you pay at closing:

Negotiate Seller Concessions: Sellers are often willing to cover some of your closing costs, especially in a buyer’s market. Depending on your loan type and down payment, you can receive between 3% and 6% of the purchase price in seller-paid costs.

Use Lender Credits: Lenders may offer a credit toward your closing costs if you accept a slightly higher interest rate. This can save you thousands upfront, although your monthly payment will increase slightly.

Shop for Third-Party Services: Title insurance, homeowners insurance, and other third-party services can vary significantly in price. Get multiple quotes to avoid overpaying.

Waive Escrows (If Allowed): You may be able to waive escrows for taxes and insurance and pay them yourself directly. This reduces upfront reserves but may come with a higher interest rate, typically 0.125% to 0.25% more.

Finance Eligible Costs: Certain costs, like FHA’s UFMIP and the VA funding fee, can be rolled into your loan. This increases your loan balance but reduces how much you need at closing. For example, rolling $5,000 into a 30-year mortgage at 6.5% interest adds more than $6,000 in interest over the life of the loan.

New Construction vs. Existing Homes

Closing costs can differ significantly depending on whether you’re buying a brand-new home or an existing property.

New Construction Homes:

• May include builder-specific administrative or inspection fees
• Often require higher escrowed reserves due to the potential for massive increases in assessed values after closing (Remember: they were paying property taxes on an assessed value that only included a lot of land before closing on this home)
• Frequently offer builder incentives to use their in-house mortgage provider to decrease the closing costs or your mortgage rate at closing.

Existing Homes:

• Tend to have more stable and known tax assessments
• Fewer surprise fees, but buyers may need immediate cash for repairs or updates

Common Myths About Closing Costs

Myth 1: Closing costs are the same regardless of lender. Each lender has its own fee structure. Mortgage brokers often shop across multiple lenders to help you find the best combination of rate and closing cost.

Myth 2: You can’t negotiate closing costs. You can often negotiate certain fees, especially lender or title charges, or request seller-paid contributions.

Myth 3: Your down payment covers closing costs. Closing costs and down payments are separate. Both must be budgeted for unless credits or concessions cover them.

Should You Pay Discount Points?

Discount points are prepaid interest fees you pay at closing to lower your interest rate. One point equals 1% of your loan amount and typically lowers your rate by 0.25%.

When It Makes Sense: If you plan to stay in the home for a long time, the upfront cost may be worth the monthly savings.

When It Doesn’t: If you expect to refinance or sell within a few years, you likely won’t recoup the cost of the points.

Example: If you pay $3,000 for one point and it reduces your monthly payment by $50, it would take 60 months to break even. If you move or refinance before then, you lose money.

Glossary of Key Terms

Escrow: A separate account held by the lender to manage your property tax and insurance payments.

Origination Fee: A lender charge to process your loan application.

Proration: The act of dividing costs (such as taxes) between buyer and seller based on time of ownership.

PMI: Private mortgage insurance, usually required for conventional loans with less than 20% down.

Title Insurance: Protects against legal issues with the home’s ownership history.

Frequently Asked Questions

What is included in closing costs? Loan fees, third-party services (like title, inspections, and appraisals), and prepaid items such as taxes and insurance.

What is the most expensive closing cost? The most expensive items tend to be title services, homeowners insurance, discount points (if any) escrowed property taxes, and mortgage insurance premiums (especially for FHA loans).

How much are closing costs on a $300,000 house? They generally range from $6,000 to $10,000, depending on the transaction structure, lender fees, and escrowed items.

What are closing costs on a $400,000 house? Expect closing costs between $8,000 and $15,000 depending on the time of year, loan type, and whether you negotiate credits or roll in any fees.

Final Thoughts

Closing costs can be complex, but they don’t have to be confusing. At LendFriend Mortgage, we help you understand every charge, structure your transaction to reduce out-of-pocket expenses, and compare your options for lender credits, escrow waivers, and fee roll-ins. We believe transparency helps buyers make smarter, more confident decisions.