Closing Costs & RESPA
The Real Estate Settlement Procedures Act (RESPA) contains information regarding the settlement or closing costs buyers and sellers obtain during a real estate transaction. Within 3-days from the time of your mortgage application, your lender is required to provide you a “good faith estimate of settlement costs” (GFE) based on their understanding of your purchase contract. This will give you an estimated idea of the amount of funds that you’ll need to bring to the table at closing.
What is Closing?
When a seller accepts an offer from a buyer, the earnest money deposit is put into an escrow account and this is called “opening escrow”. Escrow is the middleman that handles all of the funds and transaction throughout to the process collecting data from lenders, agents, buyers, and sellers. Once the transaction is completed and all documents have been signed, escrow is then closed and funds are disbursed to the seller and the real estate agents. Think of it as opening a transaction and when the transaction is complete it is closed. Most paperwork in closing or settlement is done by attorneys and real estate professionals.
Before final closing or before you sign all of the closing documents and loan paperwork, it’s imperative to do a final walk-through on the property. If anything has changed, repairs have been made, or if for some reason the seller has trashed the property, it’s important to know this before closing. Once you close on a property it becomes yours and all responsibilities therein.
What are the Closing Costs?
Closing costs are a variety of fees and costs involved in the real estate transaction. These can range anywhere from $2000 – $20,000 depending on the needs, the property, and the price. Your transaction may or may not include the following:
Transfer Taxes – Required by some localities to transfer the title and deed from the seller to the buyer.
Courier Fees – Transfer of documents
Deed Recording Fees – To pay for the County Clerk to record the deed and mortgage, and to change the property tax billing.
Pro-Rated Taxes – Such as school taxes and municipal taxes may need to be split between the buyer and the seller since 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, and the seller would owe for the other 10-months. Pro-rated taxes are usually 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.
State & Local Fees – Other state and local mortgage taxes and fees may apply.
Real Estate Agent’s Sales Commission – The seller pays the real estate agent’s commission, and if one agent lists the property and another sells it, the commission is usually split. The commission is negotiable between the seller and the agent.
Origination Fee – For processing the mortgage application there may be a flat fee or a percentage of the mortgage loan.
Credit Report – Most lenders require a credit report on you and your spouse or an equity partner. This fee is often a part of the origination fee.
Points – One point is equal to 1% of the amount borrowed and can be payable when the loan is approved either before or at closing. Points can be shared with the seller which is negotiable in the purchase offer. Some lenders will let you finance points which will add to the mortgage cost. If you pay the points up front they are tax deductible in the year they are paid. Different deductibility rules apply to second home loans.
Lender’s Attorney’s Fees (only necessary in certain states) – For your attorney to draw up documents and to ensure that the title is clear, and for representation at the closing.
Document Preparation Fees – There are several documents and papers prepared during the home-buying process ranging from the application to the closing. Lenders may charge for this, or the fees may be included in the application and/or attorney’s fees.
Preparation of Amortization Schedule – Some lenders will prepare a detailed amortization for the full term of your mortgage. This is usually done for fixed mortgages or adjustable mortgages.
Land Survey – Lenders may require that the property be surveyed to ensure it has not been encroached and to verify the buildings and improvements to the property.
Appraisals – Professional Appraisers can do a comparison of the value of the property to that of other recently sold neighborhood properties. Lenders want to be sure the property is worth the value of the mortgage loan.
Lender’s Mortgage Insurance – If your down payment is 20% or less, many lenders require that you purchase Private Mortgage Insurance (PMI) for the loan amount. If you should default on your loan, the lender will recover their money. These insurance premiums will continue until your principal payments, plus the down payment equal to 20% of the selling price and may continue for the life of the loan. The premiums are usually added to any amount you must escrow for taxes and homeowner’s insurance.
Lender’s Title Insurance – Even with a title search for any property obstacles, liens or lawsuits, many lenders require insurance to protect their mortgage investment. This is a 1-time insurance premium usually paid at closing and is for the lender only, not the homebuyer.
Release Fees – If the seller has worked with a contractor who put a lien on the house and is expecting payment from the proceeds of the house sale, there may be fees to release the lien. The seller usually pays these fees which could be negotiated in the purchase offer.
Inspections Required by Lenders – The lender may require a Termite Inspection if you apply for an FHA or a VA mortgage loan. In many rural areas, a water test may be required to ensure the well and water system will maintain an adequate water supply to the house; for quantity, not quality. Depending on the sales contract and property type, additional inspections may be required.
Prepaid Interest – The first regular mortgage payment is usually due from 6-8 weeks from closings; however, interest costs begin at closing time. The lender will calculate the interest owed for that period of time, and that fraction of interest is sometimes due at closing.
Escrow Account – Lenders often require that you set-up an Escrow Account, where you will make monthly payments to, for taxes, homeowner’s insurance, and sometimes PMI (Private Mortgage Insurance). The amount placed in this account at closing depends on when property taxes are due and the timing of the settlement transaction. The lender can give you a cost approximation during the application process of your mortgage loan.
Up-Front Expenses
Earnest Money – This is the money that “holds” the property during the transaction so no other buyer can swoop in an hijack the deal. This is usually 1-3% of the purchase price.
Inspection Fees – Lenders may require inspections, and you can make your purchase offer contingent based on satisfactory completion of some other inspections such as structural, water quality tests, septic, termite, roof and radon tests. These can range from $150 – $800
Owner’s Title Insurance – You may want to purchase title insurance in case of unforeseen problems so you’re not left owing a mortgage on the property you no longer own.
Appraisal Fees – You may want to hire an Appraiser either before you sign a purchase offer or after reviewing the lender’s appraisal report.
Money to the Seller – You’ll need to pay for items in the house you want that were not negotiated in the purchase offer such as appliances, light fixtures, drapes, lawn furniture, or fuel oil and propane left in tanks.
Moving Expenses – If you are changing jobs, your new employer may pay for your relocation, otherwise you must figure in the moving costs such as truck rentals, professional movers, cash for utility deposits like telephone, cable, electricity, etc.
Escrow Account Funds – In the purchase offer, you can request that the seller set up an Escrow Account to defray any costs for major cleanup, radon mitigation procedures, house painting, appliance repairs, etc. Depending on the purchase offer contract and contingency clauses, you may discover that you have expenses upon moving in.
Optional Fees if Necessary
Attorney Fees – You may want to hire an attorney when purchasing a home. They usually charge a percentage of the selling price up to 1%, or some work on an hourly basis or for a flat fee.
Title Search Costs – Usually your attorney will perform or will arrange for the title search to ensure there are no obstacles such as liens or lawsuits regarding the property. Or you may work with a title company to verify a clear property title.
Homeowner’s Insurance – Most lenders require you prepay the first year’s premium for homeowners insurance, sometimes called hazard insurance, and must show proof of payment at the closing. This ensures that the investment will be secured even if the property is destroyed.