Of all the steps in buying a home or refinancing a loan, the mortgage closing or settlement probably causes more confusion and uncertainty for the borrower than any other.
A settlement may involve several people, and a variety of documents and fees. Once you understand what is involved, you may find the entire closing process far simpler than you might have imagined. While this brochure focuses on settlements in home purchases, much of the information also will be useful if you are refinancing a mortgage.
Let's start with two important facts: 
Many buyers may think of settlement as the last step to becoming the legal
owners of their new home. But it's a process that begins weeks or even
months before, and follows an outline set largely by a buyer's original
offer to the seller of the house. That offer becomes the sales contract,
once it's signed by the seller, and it covers many of the key elements
of the settlement or closing.
Practices differ from one locality to another regarding who pays what closing
costs. Across the country, however, buyers and sellers are free to negotiate
certain fees. In some cases, certain costs can be shifted, it may affect
the sale price of the property. In most states, costs can also be cut by
shopping around among providers of the settlement services.
The point is this: The more you know about the process, the better your chances are for saving money at settlement time.
Types of Closing Costs
There are three basic categories
of charges and fees in settlement or closing transactions:
- Charges for establishing and transferring ownership.
- Amounts paid to state and local governments.
- Costs of getting a mortgage.
These include title search, title insurance, related legal fees, and fees for conducting the settlement.
These include city, county and state transfer taxes, recordation fees, and prepaid property taxes.
These include survey, appraisals, credit checks, loan documentation fees, notary charges, loan origination, commitment and processing fees, hazard insurance, interest pre-payments, and lender's inspection fees.
Title Search: Who Owns What?
When someone buys or sells a car,
proving ownership is relatively easy. The owner has a certificate of title
issued by the state in which the car is registered. When it comes to houses,
providing clear title is not so simple. Moreover, your lending institution
will not give you a mortgage loan on a house unless you can prove that
the seller owns it. The proof comes in the title search.
How the title search is carried out depends upon where the property is located. In many parts of the country, public records affecting real estate title are spread among several 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) also must be examined.
In a few localities, property records are fully computerized and the job can be completed fairly quickly. In the majority of localities, however, title search must be performed to establish the seller's clear title. This means examining public records, in courthouses and elsewhere, to assure both you and your lender that there are no claims against the property that you are buying.
The title search may be carried out by an escrow or title company, a lawyer, or other specialist.
Title Insurance
In addition to a formal title
search, your lender is likely to require a title insurance policy. The
policy guards the lender against an error by whomever searched the title.
(In some cases, the title insurer might arrange for or conduct the title
search.) Let's say, for example, that a long-lost relative of the seller
turns up with indisputable evidence that the relative - and not the seller
- holds legal title to the property. Though it should have been found in
the public records, the relative's claim was missed somehow. Errors are
rare, but they do occur.
When this happens, the lending institution finds that it has loaned the home buyer thousands of dollars to buy a house from someone who did not own it. To avoid such problems, the lender will insist on title insurance prior to settlement. The cost of the policy ( a one-time premium ) is usually based on the loan amount, and is often paid by the purchaser. There's nothing, however, to keep you from asking the seller, during your negotiations, to pay part or all of the premium.
The title insurance required by the lender protects only the lender. To protect yourself against unforeseen title problems, you may also want to take out an owner's title insurance policy. Normally the additional premium cost is only a fraction of the lender's policy, but this can vary from area to area.
Some final advice on keeping title insurance costs low: if the house you are buying was owned by the seller for only a few years, check with a title company. If you can obtain a re- issue rate, the premium is likely to be significantly lower than the regular charge for a new policy. If no claims have been made against the title since the previous title search was done, the seller's insurer may consider the property to be a lower insurance risk.
Finally, shop around. Not just for the premium (which can vary depending on how much competition there is in a market area), but for coverage as well . Generally, you should look for a policy with as few exclusions from coverage as possible. The exclusions are listed in each policy. Some policies have so many exclusions - that is, situations under which the insurer will not pay for your title problems - that you end up with little coverage for your premium dollar.
Government Imposed Costs
In some parts of the country,
the transfer, recordation, and property taxes collected by local and state
governments may be among the heftiest charges paid at settlement.
While there is no way to avoid paying these taxes, you may be able to lessen your share of the bill. Try shifting some or all of the cost to the house. But remember, you must do this when you make your offer to purchase the property.
Mortgage-Related Closing Costs
The costs of getting a mortgage
may be imposed by your lender as early as when you apply for your loan.
Mortgage-related closing costs include:
- Application Fee.
- Appraisal Fee.
- Survey.
- Loan Origination Fees and Discount Points.
- Mortgage Insurance.
- Homeowner's & Hazard Insurance.
Imposed by your lender, this charge covers the initial costs of processing your loan request and checking your credit report.
This fee pays for an independent appraisal of the home you want to purchase. The lender requires this opinion or estimate of the market value of the house for the loan.
At a minimum, the lender will require an independent verification from a surveying firm that your lot has not been encroached upon by any structures since the last survey conducted on the property. Alternatively, the lender may insist upon a complete (and more costly) survey to ensure that the house and other structures legally are where you and the seller say they are.
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 to increase the yield to the lender beyond the stated interest rate on the mortgage note. 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.
Buyers who make down payments less than 20 percent (and in some cases 30 percent) of the value of the house may be required by lenders, and by law in some states, to take out mortgage insurance. The policy covers the lender's risk in the event the buyer fails to make the loan payments. Premiums are typically 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 fees.
A form or protection against physical damage to the house by fire, wind, vandalism, and other causes. Your lender will expect you to have a policy in effect at closing.
Miscellaneous Closing Costs
Depending upon the location and
type of property, and extra services you or your lender request, you may
also have to pay some of the following at closing:
- An assumption fee is charged when you are taking over or assuming an existing mortgage on the house. The size of the fee will depend on the lender, but it may range from several hundred dollars to 1 percent of the loan amount.
- Home inspection fees for an analysis of the structural condition of the property by an engineer or consultant, and for termite inspections.
- Adjustments for various types of expenses prorated between the seller and the purchaser. Some of the adjustments may involve large amounts. Local property taxes, annual condominium fees and other lump-sum service charges, for instance, may be split between you and the seller to cover your respective periods of ownership for the calendar year or tax period.
How Can You Anticipate How Much You Will Have To Pay In Closing Costs?
With such a long list of potential
charges at settlement, it is important to know what to expect. To enable
you to do that, Congress passed the Real Estate Settlement Procedures
Act (RESPA). Your mortgage lender is required to supply you with a
Good Faith Estimate of all your closing costs within three business
days of your application for a loan, together with a special information
booklet called Settlement Costs - A HUD Guide. In addition, a statement
of your actual costs should be given to you at or before settlement. Within
the same three days, the lender is required, under the Truth in Lending
Act, to provide you with a disclosure estimating the costs of the loan
you have applied for, including your total finance charge and the Annual
Percentage Rate (APR). The APR expresses the cost of your loan as a
yearly rate. This rate is likely to be higher than the stated interest
rate on your mortgage because it takes into account discount points, mortgage
insurance, and certain other fees that add to the cost of your loan.
What Charges Are You Likely To Encounter For Different Services?
Because customs vary significantly
from area to area, it is difficult to provide estimates for closing costs
that fit everywhere. One rule of thumb for buyers is to figure that at
least an additional 3 percent will be added to the price of your home through
settlement expenses. In some relatively high-tax areas of the country,
5 to 6 percent is more common.
On the table below, is a sample
range of closing cost charges for specific services on a $75,000 home purchase
with either a 10 percent down payment or a 20 percent down payment.
| Down Payment | 10 % | 20% |
|---|---|---|
| Loan Application Fees | $75 to $300 | $75 to $300 |
| Loan Origination Fees | $675 | $600 |
| Points | $675 to $2,025 | $600 to $1,800 |
| Mortgage Insurance | $338 to $675 | $338 to $675 |
| Title Search/Insurance Fees | $450 to $600 | $450 to $600 |
| Attorney's Fees | $500 to $1,500 | $500 to $1,500 |
| Appraisal | $100 to $300 | $100 to $300 |
| Homeowners Insurance | $300 to $600 | $300 to $600 |
| Inspections | $175 to $350 | $175 to $350 |
| Survey | $125 to $300 | $125 to $300 |
| Notary Fees | $10 to $25 | $10 to $25 |
| Recording Fees | $40 to $60 | $40 to $60 |
| State/Local Transfer Fees | $75 to $1,125 | $75 to $1,125 |
|
____________ | ____________ |
| TOTAL | $3,438 to $8,235 | $2,950 to $7,260 |
Remember the key rules:
- think about settlement fees before you submit your sales offer;
- shop around for competitive prices for as many services as possible; and
- never hesitate to negotiate.
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