Closing Costs

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.

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. 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 may 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: You may be required to prepay the first year's premium for homeowner's insurance (sometimes called hazard insurance) and bring proof of payment to the closing. This insures the 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. All our fees will be full presented and disclosed at the very beginning of the loan application process. Here is a list of different fees that other lenders may charge you:

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. We may be able to let you finance points, adding this cost to the mortgage. However, this 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 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.


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, we are required to provide you with a "good faith estimate of settlement costs," based on our 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 us 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.


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.