Closing Costs
What Happens at Closing?
In terms of a Sale transaction, the property is officially transferred from the seller to you at “Closing”. Funding occurs normally the day prior to the recording date which is considered the closing date. If you are refinancing, closing would mean the same thing however after signing the loan docs with the title company there is a 3 day recession period before the loan can fund and record.
For a purchase transaction prior to closing you should have a final inspection, or “walk-through” to insure requested repairs were performed, and items agreed to remain with the house are there such as drapes, lighting fixtures, etc. In most states the settlement is completed by a title or escrow firm in which you forward all materials and information plus the appropriate cashier’s checks so the firm can make the necessary disbursement. Your real estate agentwill deliver the keys to you upon the loan recording.
What are Statutory Costs?
These are expenses you have to pay to state and local agencies, 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. Some lenders may require you to set up an escrow account to cover these bills. If not, you may want to set one up yourself to insure the funds are set aside for these important expenses.
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, even if you paid cash for the property:
Escrow fees – These fees are paid to the escrow company to complete the transaction as an independent 3rd party to the transaction. They will also supply title insurance to insure the properties title.
Title Search Costs – Usually your escrow/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 – On a purchase the lender requires that you pay the first year’s premium for homeowners insurance, sometimes called hazard insurance, and must show proof of payment at the closing. This insures that the investment will be secured even if the property is destroyed.
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?
Below are some of the common charges that you will see when refinancing your home or purchasing a new Bay Area home:
Underwriting Fee – For processing the mortgage application there may be a flat fee paid to the lender.
Credit Report – Lenders will require a credit report to be completed for you and your spouse, or an equity partner.
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. (On a refinance you can finance the points or pay them out of pocket). For a purchase 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.
Escrow Fees – Fees to ensure that the title is clear, and for representation at the closing. Document Preparation Fees –
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.
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 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 home buyer.
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 for your Bay Area mortgage loan.
Are There Any Other Up-Front Expenses?
Appraisal Fees – You will have to get an appraisal done on your home or the home that is being purchased.
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 “good faith estimate of settlement costs” (GFE) 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 Uniform Settlement Statement used at your closing. You are entitled to see a copy of the statement 1-business day prior to closing indicating your final costs.
What is “Truth in Lending” (TIL)?
It’s required that mortgage lenders provide you with a Truth in Lending (TIL) Statement containing information on your loan’s annual percentage rate, finance charges, the amount financed, and the total payments required.
The TIL Statement may also contain information on security interest, late fees, prepayment provisions, and if the mortgage is assumable. If you have an adjustable rate loan, the statement may outline the limits on the adjustments, annual and lifetime caps, and give an example of what your next year’s payment may be depending on interest rates. For adjustable rate loans the total payments figure is estimated as a worst-case scenario. The figure reflects the payments you would make if your loan adjusted upward to the maximum rate allowed by annual and lifetime caps, and then stayed at that rate for the loan duration.