What happens at
closing?
Statutory Costs
Third-Party Costs
Finance and Lender
Charges
Other Up-Front
Expenses
What is RESPA?
What is "Truth in
Lending"?
What happens at
closing ?
At the closing,
ownership of the
newly purchased home
is officially
transferred from the
seller to you. It
may involve you, the
seller, the real
estate agent, your
attorney, the
lender's attorney,
representatives from
the title or escrow
firm, and a variety
of clerks,
secretaries, and
other staff. It is
possible to have an
attorney act on your
behalf if you cannot
attend the meeting
(for example, if the
house is in another
state). Closing can
take as little time
as an hour to sign
all the forms and
transfer ownership
or it can take
several hours,
depending on the
contingency clauses
in the purchase
offer (and any
escrow accounts that
may need to be set
up).
Much of the
paperwork involved
in closing (or
settlement) is done
by attorneys and
real estate
professionals. You
may be involved in
some of the closing
activities and not
in others, depending
on local customs and
on the professionals
with whom you are
working.
Before you close on
the house, you
should have a final
inspection, or
walk-through, to
make sure any
repairs you
requested have been
made and that items
which were to remain
with the house
(drapes, light
fixtures) are still
there.
In most states,
settlement is done
by a title or escrow
firm to which you
forward all the
materials and
information along
with the appropriate
cashiers' checks,
and the firm will
make the necessary
disbursements. The
real estate agent or
another
representative of
the title company
will deliver the
check to the seller
and the house keys
to you.
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Statutory Costs
Statutory costs are
expenses you would
have to pay to state
and local agencies
even if you paid
cash for the house
and did not need to
take out a mortgage.
They include the
following:
Transfer taxes
are required by some
localities to
transfer the title
and deed from the
seller to you.
Recording fees for
deed pay for the county clerk to record the deed and mortgage and
change the property
tax billing.
Pro-rated taxes
such as school taxes
and municipal taxes
may have to be split
between you and the
seller because they
are due at different
times of the year.
For example, if
taxes are due in
October and you
close in August, you
would owe taxes for
2 months while the
seller would owe
taxes for the other
10 months. Prorated
taxes usually are
paid based on the
number of days (not
months) of
ownership. Some
lenders may require
you to set up an
escrow account to
cover these bills.
If your lender does
not require an
escrow account, you
may want to set up a
special account on
your own to make
sure you have money
set aside for these
important, and
large, bills.
Other state and
local fees can include mortgage taxes levied by states as well as other
local fees.
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Third-Party Costs
Third-party costs
are expenses paid to
others such as
inspectors or
insurance firms. You
would have to pay
many of these
expenses even if you
paid cash for the
house. Examples of
third-party costs
are as follows:
Attorney fees:
You will probably
want to work with an
attorney when buying
a home. Attorneys
usually charge a
percentage of the
selling price
(three-fourths or 1
percent), but some
may work for a flat
fee or on an hourly
basis.
Title search costs: Usually your attorney will do or arrange for the title search to
make sure there are
no obstacles (liens,
lawsuits) to your
owning the home. In
some cases, you may
work with a title
company to verify a
clear title to the
property.
Homeowner's
insurance: Most lenders require that you prepay the first year's premium for
homeowner's
insurance (sometimes
called hazard
insurance) and bring
proof of payment to
the closing. This
insures that their
investment will be
secured, even if the
house is destroyed.
Real estate agent's
sales commission: The seller pays the commission to the real
estate agent. If one
agent lists the
property and another
sells it, the
commission usually
is split between the
two. It's important
to keep in mind that
even the commission
is negotiable
between the seller
and the agent.
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Finance and Lender
Charges
Most people
associate closing
costs with the
finance charges
levied by mortgage
lenders. The charges
you pay will vary
among lenders, so it
pays to shop around
for the best
combination of
mortgage terms and
closing (or
settlement) costs.
You may have to pay
the following
charges:
Origination or
application fees: These are fees for processing the mortgage application and
may be a flat fee or
a percentage of the
mortgage.
Credit report: If you are making a small down payment (usually less than 25%),
most lenders will
require a credit
report on you and
your spouse or
equity partner. This
fee often is a part
of the origination
fee.
Points:
A point is equal to
1% of the amount
borrowed. Points can
be payable when the
loan is approved
(before closing) or
at closing. Points
can be shared with
the seller--you may
want to negotiate
this in the purchase
offer. Some lenders
will let you finance
points, adding this
cost to the
mortgage, which will
increase your
interest costs. If
you pay the points
up front, they are
deductible in your
income taxes in the
year they are paid.
Different
deductibility rules
apply to second
homes.
Lender's attorney's
fees:
Lenders may have their attorney draw up documents, check to see
that the title is
clear, and represent
them at the closing.
Document preparation
fees: You will see an amazing array of papers, ranging from the
application to the
acceptance to the
closing documents.
Lenders may charge
for these, or they
may be included in
the application
and/or attorney's
fees.
Preparation of
amortization
schedule: Some lenders will prepare a detailed
amortization
schedule for the
full term of your
mortgage. They are
more likely to do
this for fixed
mortgages than for
adjustable
mortgages.
Land survey: Most lenders will require that the property be surveyed to make
sure that no one has
encroached on it and
to verify the
buildings and
improvements to the
property.
Appraisals:
Lenders want to be
sure the property is
worth at least as
much as the
mortgage.
Professional
property appraisers
will compare the
value of the house
to that of similar
properties in the
neighborhood or
community.
Lender's mortgage
insurance: If your down payment is less than 20%, many lenders will
require that you
purchase private
mortgage insurance
(PMI) for the amount
of the loan. This
way, if you default
on the loan, the
lender will recover
his money. These
insurance premiums
will continue until
your principal
payments plus down
payment equal 20% of
the selling price,
but they may
continue for the
life of the loan.
The premiums usually
are added to any
amount you must
escrow for taxes and
homeowner's
insurance.
Lender's title
insurance: Even though there is a title search for any obstacle (liens,
lawsuits), many
lenders require
insurance so that
should a problem
arise, they can
recover their
mortgage investment.
This is a one-time
insurance premium,
usually paid at
closing; it is
insurance for the
lender only, not for
you as a purchaser.
Release fees:
If the seller has
worked with a
contractor who has
put a lien on the
house and who
expects to be paid
from the proceeds of
the sale of the
house, there may be
some fees to release
the lien. Although
the seller usually
pays these fees,
they could be
negotiated in the
purchase offer.
Inspections required
by lender (termite,
water tests):
If you apply for an
FHA or VA mortgage,
the lender will
require a termite
inspection. In many
rural areas, lenders
will require a water
test to make sure
the well and water
system will maintain
an adequate supply
of water to the
house (this is
usually a test for
quantity, not a test
for water quality).
Prepaid interest: Your first regular mortgage payment is usually due about 6 to 8
weeks after you
close (for example,
if you close in
August, your first
regular payment will
be in October; the
October payment
covers the cost of
borrowing money for
the month of
September). Interest
costs, however,
start as soon as you
close. The lender
will calculate how
much interest you
owe for the fraction
of the month in
which you close (for
example, if you
close on August 25,
you would owe
interest for 6
days). In some cases
this is due at
closing.
Escrow account: Lenders will often require that you set up an escrow account into
which you will make
monthly payments for
taxes, homeowner's
insurance, and PMI
(mortgage insurance,
if required). The
amount placed in
this escrow account
at closing depends
on when property
taxes are due and
the timing of the
settlement
transaction. The
lender should be
able to give you a
close approximation
of these costs at
the time you apply
for your mortgage
loan.
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Other Up-Front
Expenses
The major portion of
other up-front
expenses is the
deposit or binder
you make at the time
of the purchase
offer and the
remaining cash down
payment you make at
closing. In addition
to the deposit and
down payment, other
up-front expenses
can include the
following:
Inspections:
In addition to
inspections required
by the lender, you
may make the
purchase offer
contingent on
satisfactory
completion of some
other inspections.
These inspections
might include:
structural, water
quality tests and
radon tests. You and
the seller will need
to negotiate these
fees.
Owner's title
insurance: You may want to purchase title insurance for yourself so that if
problems arise, you
are not left owing a
mortgage on a
property you no
longer own. A
thorough title
search (going back
to 1900 if
necessary) is often
assurance enough of
a clear title.
Appraisal fees:
You may want to hire your own appraiser, either before you sigh a
purchase offer or
after seeing the
results of the
lender's appraisal.
Money to the seller:
You will need to pay for items in the house that you want and that
were not negotiated
in the purchase
offer. Such items
may include
appliances, light
fixtures, drapes, or
lawn furniture and
also fuel oil and
propane left in
tanks.
Moving expenses:
If you are changing jobs, your new employer may pay for your move.
Otherwise, you must
figure in the cost
of moving, either
truck rental and
hired help or a
professional mover.
Shopping around for
moving services can
pay off. You will
also need cash for
utility deposits
(phone, cable, and
the like).
Escrow account
funds: In the purchase offer, you can request that the seller set up an
escrow account to
defray any costs of
major cleanup, radon
mitigation
procedures, house
painting, or other
items. Also, if you
have not had a
chance to try out
some appliances (the
furnace if you buy
in the summer or the
air conditioner if
you buy in the
winter), you may
request an escrow
account to cover
repairs if
necessary.
Depending on the
purchase offer
contract and
contingency clauses,
you may find you
have some expenses
immediately upon
moving in. For
example, suppose
your purchase offer
contract has a
clause making the
purchase contingent
on a satisfactory
structural
inspection, and the
inspector determines
that the house will
need a new roof. You
could negotiate to
have the seller
arrange for the work
to be done, but this
will probably delay
the closing
date--and you may
have to agree to a
higher price for the
house or to cover
some of the expenses
of the new roof. Or
you and the seller
may be able to split
the cost of a new
roof, put on after
you move in, using
estimates from a
contractor of your
choice, each of you
putting funds into
an escrow account
for the new roof. Or
the seller may be
willing to reduce
the sale price of
the house by an
amount you think is
fair. In either
case, shortly after
moving into your new
home, you will need
cash for a new roof.
Time investment:
An often overlooked major up-front cost in buying a home is the
time investment. The
average household
spends about 4
months house hunting
and looks at an
average of 20 houses
before closing a
deal. In addition to
shopping for a home,
you also spend time
trying to find the
best mortgage terms
and an attorney who
will assist you with
the legal issues in
purchasing a home.
How much time you
spend looking for a
home, a mortgage,
and an attorney
depends on your
location. You will
spend less time if
you know what you
want in a house and
know much you can
afford, and working
with real estate
agents will help
narrow the choices.
How many mortgage
lenders are in your
area? You can reduce
time costs in
mortgage shopping by
keeping an eye on
advertisements and
use the internet to
search for the best
deals.
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What is RESPA?
The Real Estate
Settlement
Procedures Act
(RESPA) contains
information on the
settlement or
closing costs you
are likely to face.
Within 3 days of the
time you apply for
the mortgage, your
lender is required
to provide you with
a "good faith
estimate of
settlement costs,"
based on his or her
understanding of
your purchase
contract. This
estimate should give
you a good idea of
how much cash you
will need at closing
to cover pro-rated
taxes, first month's
interest, and other
settlement costs.
The act also
requires lenders to
give you an
information booklet,
Settlement Costs and
You, written by the
U.S. Department of
Housing and Urban
Development, which
discusses how to
negotiate a sales
contract, how to
work with various
professionals
(attorneys, real
estate agents,
lenders), and your
rights and
responsibilities as
a home buyer. It
also shows an
example of the
uniform settlement
statement that will
be used at your
closing.
One business day
before you close,
you are entitled to
see a copy of the
Uniform Settlement
Statement with your
figures on it so you
will know just how
much the final costs
will be.
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What is Truth in
Lending?
Mortgage lenders are
required to give you
a Truth in Lending
(TIL) statement
containing
information on the
annual percentage
rate, the finance
charge, the amount
financed, and the
total payments
required. For
adjustable rate
loans, the "total
payments" figure is
estimated as a
"worst case"
scenario. The figure
represents the
payments you would
make if your loan
adjusted upward to
the maximum rate
allowed by annual
and lifetime caps
and then stayed
there for the
duration of the
loan.
The TIL statement
may also contain
information on
security interest,
late charges,
prepayment
provisions, and
whether the mortgage
is assumable. If you
have an adjustable
rate loan, it may
outline the limits
on the adjustments
(annual and lifetime
caps) and give an
example of what your
next year's payment
might be, depending
on interest rates.
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