Closing
At the closing of a purchase transaction, ownership of the newly purchased home is officially transferred from the seller to the buyer. It may involve the buyer, the seller, real estate agents, attorneys, 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 the buyer’s behalf if they cannot attend the closing (for example, if the home 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. The buyer may be involved in some of the closing activities and not in others, depending on local customs and on the professionals with whom they are working.
Before you close on the house, the buyer should have a final inspection, or walk-through, to make sure any repairs they 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 the buyer forwards all the materials and information along with the appropriate cashier’s check, 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 the buyer.
Statutory Costs
Statutory costs are expenses the buyer will have to pay to state and local agencies even if they 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 the buyer.
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 the buyer and the seller because they are due at different times of the year. For example, if taxes are due in October and the closing is in August, the buyer 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 the buyer to set up an escrow account to cover these bills. If the lender does not require an escrow account, the buyer may want to set up a special account on their own to make sure they 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.
Third-Party Costs
Third-party costs are expenses paid to others such as inspectors or insurance firms. The buyer will have to pay many of these expenses even if they pay cash for the house. Examples of third-party costs are as follows:
Attorney fees:
The buyer 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 the attorneys will arrange for the title search to make sure there are no obstacles (liens, lawsuits) to the transaction. In some cases, the buyer and seller may work with a title company to verify a clear title to the property.Homeowner's insurance:
Most lenders require that the buyer prepay the first year's premium for homeowner's insurance (sometimes called hazard insurance) and bring proof of payment to the closing. This ensures 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.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 is smart to shop around for the best combination of mortgage terms and closing (or settlement) costs. The buyer 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:
This fee is for obtaining the buyer’s credit report and FICO score.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—the buyer may want to negotiate this in the purchase offer. Some lenders will let the buyer finance points, adding this cost to the mortgage, which will increase the buyer’s interest costs. If the buyer pays the points up front, they are usually deductible in their 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:
Lenders may charge for all the documents that need to be generated, 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 the buyer’s 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 adequately collateralizes the loan. 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 the buyer’s down payment is less than 20%, many lenders will require that they purchase private mortgage insurance (PMI) for the amount of the loan. The insurance provides that if the buyer defaults on the loan, the lender will recover their money. These insurance premiums will continue until the 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 the buyer 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 the buyer.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 the buyer applies 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:
The first regular mortgage payment is usually due about 6 to 8 weeks after the closing (for example, if the buyer closes in August, the 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 the buyer closes. The lender will calculate how much interest is owed for the fraction of the month in which the closing takes place (for example, if the closing is on August 25, the buyer would owe interest for 6 days). In most cases this is due at closing.Escrow account:
Lenders will often require that the buyer set up an escrow account into which monthly payments for taxes, homeowner's insurance, and PMI (mortgage insurance, if required) are made. 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 a close approximation of these costs at the time the buyer applies for a mortgage loan.Other Up-Front Expenses
The major portion of other up-front expenses is the deposit or earnest money the buyer gives at the time of the purchase offer and the remaining cash down payment the buyer makes at closing. In addition to the deposit and down payment, other up-front expenses can include the following:
