can be one of the most confusing aspects of buying a
home or refinancing a loan. The process begins with
your bid, the sales agreement and your loan application.
It ends the day of closing when all of the necessary
documents are reviewed and signed, and corresponding
fees are paid. Usually, it takes between 60 to 90 days
to complete the closing process.
Several parties are involved in the closing process,
in addition to you and the seller, including attorneys
and mortgage and title company representatives. Your
attorney will coordinate with each participant to choose
a closing date. Keep in mind that it takes time to gather
all of the documentation, and if the paperwork is not
completed on schedule, it is possible that the closing
date can change. This uncertainty can be particularly
stressful for buyers who are also selling a home, since
the closing date generally dictates moving arrangements.
For your closing, you will need to be prepared with
photo proof of identification for each buyer, your new
homeowner's policy, as well as various other documents
which your attorney will advise you of. And, don't forget
your checkbook! The closing is where most fees are settled.
The Real Estate Settlement Procedures Act (RESPA)
governs the loan application and closing process. RESPA
ensures that homebuyers receive timely notification
of closing and other costs. It is also a good idea to
review a copy of "Settlement Costs - a HUD guide,"
if you haven't already received a copy from your lender,
call your local HUD office to request a free copy.
Real estate practices and closing costs vary widely
in different areas of the country, and from lender to
lender. However, buyers and sellers are free to negotiate
certain fees. It's best to do your research before you
make any offers, so you're in the best position to negotiate
with the seller. In most states, you can also cut costs
by shopping around for providers of settlement services.
Generally, you can plan to spend an additional 3 to
5 percent of the loan amount in settlement expenses
(for example, $3,000 to $5,000 on a $100,000 mortgage).
In higher-tax areas, 5 to 6 percent is more realistic.
The exact figure depends upon the location of the property
you are purchasing.
Here's a handy checklist to help
you keep track of closing costs:
| • Amount of first loan payment
• Loan underwriting fees
• Amount for escrow
|• Legal fees
• Fees for title related services
• Fees for recording services
It's important to have separate certified checks for
all closing costs. Remember to bring your checkbook
as well, so you can write a personal check for small
miscellaneous expenses that may arise.
Ask Your Lender for an Estimate
of Closing Costs
Experienced loan officers will provide a rough estimate
of closing expenses before you apply for your loan to
make it easier for you to shop around. Once you apply
for your loan, RESPA requires that your lender provide
a Good Faith Estimate of all closing costs within three
business days of your application. The lender is also
required, under the Truth in Lending Act, to provide
a disclosure estimating the costs of the loan you applied
for, including your total finance charge and the Annual
Percentage Rate (APR), within the same three days. Finally,
you will receive a statement of actual closing costs
from your lender at or before settlement.
Additional Loan Costs
The fees outlined below are generally associated with
every home loan, and are some are even required before
the close. It is also important to find out how long
your rate lock is good for and if it will extend long
enough to get you through the loan process and closing.
One of the main reasons people end up paying more for
their loans is that they don't lock in their rates for
a long enough period of time.
In a busy lending market, appraisers, title companies,
underwriting departments and other involved parties
can get backed up. Additionally, there may be other
occurrences that arise and delay the process. Keep in
mind that, although you secure a rate lock for 15 or
30 days, you may not be able to close in that amount
* Application Fee &
Imposed by your lender, the application fee covers the
initial costs of processing your loan request, and usually
includes a credit report check. The application fee
with a credit report can range from $400 to $525.
* Appraisal Fee
This fee covers an independent appraisal of the home
you want to purchase. The lender requires this estimate
of the market value of the house in order to make the
loan. The appraisal fee varies depending on the purchase
price and size of the home. For a $100,000 home, the
minimum fee would be approximately $275.00.
* Attorney Fees
Settlements are conducted by lending institutions, title
insurance companies, escrow companies, real estate brokers
and/or attorneys. In most cases, whoever conducts the
settlement is providing a service to the lender. You
may be required to pay for these legal services. You
should also retain you own attorney to represent you
at all stages of the transaction. Attorney fees are
usually based upon the purchase price of the home and
the complexity of the sale, and can range anywhere from
$600 to $1,000 and up.
* Documentation Fees
Some lenders charge miscellaneous fees for various services,
such as underwriting, processing and documentation preparation,
which usually total less than 1 percent of the loan
* Home & Pest Inspections
A home inspection by a qualified engineer and pest inspection
by a pest control specialist offer assurance that the
home you are purchasing is structurally sound and free
of termites and any related damage. The costs for these
services vary depending upon the location and size of
the property, and the professionals you choose.
* Homeowner's & Hazard
Homeowner's and hazard insurance offer protection against
physical damage to your new home by fire, wind, vandalism
and other causes. Most states require that the annual
premium on your homeowner's insurance be paid in advance
and put into effect at closing. Prices for homeowner's
insurance vary depending upon the value of the home,
the location and the insurance agency.
* Interim Interest or Daily
Rate of Interest
This cost is based upon your closing date and covers
loan interest from the day you close through the end
of the month. Therefore, it can range from 0-30 days'
interest, payable to the lender.
* Loan Origination Fees
& Discount Points
The origination fee is charged for the lender's work
in evaluating and preparing your mortgage loan. Discount
points are prepaid finance charges imposed by the lender
at closing. Essentially, paying points is a means for
the borrower to pay down the interest rate. Paying points
can save thousands over the long term, so if you plan
to be in your new home five years or longer and you
have the cash up front, it's certainly an option to
consider. One point equals one percent of the loan amount.
For example, one point on a $75,000 loan would be $750.
In some cases - especially with refinances - the points
can be financed by adding them to the loan amount.
* Mortgage Insurance (PMI)
Buyers who make down payments that equal less than 20
percent of the value of the house may be required by
lenders and, in some states, by law to take out mortgage
insurance. The policy covers the lender's risk in the
event the buyer fails to make loan payments. Premiums
are usually paid annually from an escrow or reserve
account, or in a lump sum at closing. A buyer whose
mortgage is insured by FHA or guaranteed by VA will
have to pay FHA mortgage insurance premiums or VA guarantee
At a minimum, the lender will require an independent
verification from a surveying firm that no additional
structures have been added to the lot since the last
survey was conducted on the property. The lender may
request a complete survey to ensure that the house and
other structures on the property meet legal codes and
regulations. Depending on the size of the property and
the state you live in, surveys can cost between $250
* Title Fees
In order to purchase a property, you must establish
the seller's ownership and transfer ownership from seller
to buyer. The following fees are required by a title
search company to complete this process:
* Document Preparation Fee
This is usually a flat fee paid to the title company
which can range from $50 to $200.
* Title Search
It is necessary to prove to the lender that the seller
owns the property you wish to purchase in order to get
a loan. The title search provides this proof. The title
search involves reviewing public records in local government
offices, including recorders of deeds, county courts,
tax assessors and surveyors. Records of deaths, divorces,
court judgments, liens and contests over wills (all
of which can affect ownership rights) must also be examined.
The title search assures you and your lender that there
are no claims against the property. The cost for a title
search is based upon the purchase price, and may cost
approximately $300 to $600.
* Title Insurance
In addition to the title search, title insurance protects
you and the lender from an error in the title search.
Such an error could mean that the lending institution
loaned you money to buy a house from someone who didn't
own it in the first place. Lenders' title insurance
is approximately .2 percent to .5 percent of the loan
amount, paid by the purchaser. Owner's title insurance
protects you from title search errors, and usually ranges
between .3 percent and .6 percent of the purchase price
of the home.
* Government Fees
Government-imposed fees are usually the most costly
fees you will incur at closing. These include city,
county and state transfer taxes, recording fees and
prepaid property taxes.
Most states require that four to eight months' taxes
be collected at closing and held in an escrow account.
An escrow account is a reserve account set up by your
lender in which you deposit enough money to cover the
first few months of mortgage insurance, hazard insurance
and property taxes. The purpose of the escrow account
is to ensure that sufficient funds are available to
cover these expenses once you've purchased your home.