What Happens at Closing?
The property is officially transferred from the seller to you at “Closing”.
At closing, the ownership of the property is officially transferred from the seller to you. Closing can take anywhere from 1-hour to several depending on contingency clauses in the purchase offer or complications that sometimes arise.
Most paperwork in closing or settlement is done by title companies and attorneys and real estate professionals. You may or may not be involved in some of the closing activities; it depends on who you are working with.
Prior to closing you should have a final inspection, or “walk-through” to insure nothing has changed to the home prior to closing and to insure requested repairs were performed, if applicable.
In most states the settlement is completed by a title company or escrow firm in which you forward all materials and information plus the appropriate funds needed to close so the firm can make the necessary disbursement. At closing the seller is given their funds and then the keys to the home are given to you.
What are Statutory Costs?
These are expenses you have to pay to state and local governments, even if you paid cash for the house and didn’t need a mortgage:
- Transfer Taxes– Required by some localities to transfer the title and deed from the seller to the buyer.
- 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.
- State & Local Fees– Other state and local mortgage taxes and fees may apply.
What are Third-Party Costs?
There may be expenses paid to others like inspectors or insurance firms:
- Title Search Costs– Usually your attorney or title company 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– Lenders require you prepay the first year’s premium for homeowners insurance, sometimes called hazard insurance. This is commonly done at closing and is part of your closing costs.
- 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.
What are Finance and Lender Charges?
- 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. You are only charged the actual costs of the credit reports.
- Points– One point is equal to 1% of the amount borrowed and is payable when the loan closes. Points can be shared with the seller which is negotiable in the purchase offer. You can 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.
- Lender’s Attorney’s Fees– 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.
- Land Survey– Lenders will 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 require this when you are obtaining mortgage loan.
- Lender’s Mortgage Insurance– If your down payment is less than 20%, most loan programs require that you purchase Private Mortgage Insurance (PMI) for the loan amount. If you should default on your loan, the lender will recover some of their money. The premiums are 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, lenders require insurance to protect their mortgage investment. This is a 1-time insurance premium paid at closing, and is for the lender only, not the homebuyer. It is recommended that the buyer obtain an owner’s policy to protect them in case of title issues.
- Inspections Required by Lenders– The lender may require a Termite Inspection if you apply for an FHA or a VA mortgage loan. These are dependent on the condition of the home at the time of the appraisal inspection. Roof inspections are also possible if visible damage is observed by the appraiser. 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.
Are There Any Other Up-Front Expenses?
The major portion of other up-front expenses is the deposit you make at the time of the purchase offer. The remaining cash down payment you make at closing, or can include:
- Inspections– you 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 and roof inspections. You and the seller can negotiate these inspection fees.
- 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 property you longer own. A thorough title search ensures a clear title but unless you purchase an Owner’s Title Policy you will not be protected, only the Bank will. In Florida these policies are at a discounted costs since you will have already paid for the Lender’s Policy.
- Appraisal Fees– This is the fee to complete the appraisal report. You will be provided a copy of this report before closing.
- 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, etc.
- Time Investment– One often overlooks major up-front costs in buying a home. The time and expenses invested in house-hunting, which can take up to 4-months, plus the time spent searching for the best mortgage for you, the right real estate agent, an attorney, and other related things that take up your valuable time.
What is RESPA?
The Real Estate Settlement Procedures Act (RESPA) contains information regarding the settlement or closing costs you are likely to face. Within 3-days from the time of your mortgage application, your lender is required to provide you a “Loan Estimate” (LE) based on their understanding of your purchase contract. This estimate will indicate how much cash you will need at closing to cover prorated taxes, first month’s interest, and other settlement costs.
RESPA requires lenders to give you an information booklet about settlement costs, written by the U.S. Department of Housing & Urban Development which address how to negotiate a sales contract, ways to work with professionals like attorneys, real estate agents, lenders, etc., and your given rights as a home buyer. It gives an example of the Closing Disclosure used at your closing. You are required to see a copy of the Closing Disclosure at least 72 business hours prior to closing indicating your final costs.