A closing cost is a payment required to finalize a home loan and is separate from a down-payment. Read about closing cost, their purpose, how you can pay them and more by clicking learn more below.
What Happens at Closing?
"Closing" is the last step of buying and financing a home and when the property is officially transferred from the seller to you. At Closing you and all the other parties in the mortgage loan transaction sign the necessary documents.
Your Closing may include some or all of these entities: real estate agents, your attorney, the seller’s attorney, lender's representative, title and escrow firm representatives, clerks, secretaries, and other staff. Closing can take anywhere from 1-hour to several depending on contingency clauses in the purchase offer, or any escrow instructions needing to be executed.
Most paperwork in closing or settlement is done by attorneys and real estate professionals. You may or may not be involved in some of the closing activities; it depends on who you are working with.
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 or bank wire so the firm can make the necessary disbursement. Your representative will deliver the check to the seller, and then give the keys to you.
Statutory Closing 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 – Property 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.
There may be expenses paid to others like agents, attorneys, inspectors or insurance firms, even if you paid cash for the property:
Attorney Fees – You may want to hire an attorney when purchasing a home. They usually charge a percentage of the selling price up to 1%, or some work on an hourly basis or for a flat fee.
Title Search Costs – Usually your attorney 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 – Most lenders require you prepay 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.
Origination Fee – For processing the mortgage application there may be a flat fee, or a percentage of the mortgage loan.
Credit Report – Most lenders require a credit report on you and your spouse, or an equity partner. This fee is often a part of the origination fee.
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. Some lenders will let you finance points which will add to the mortgage cost. 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.
Lender's Attorney's Fees – For your attorney to draw-up documents and to ensure that the title is clear, and for representation at the closing.
Document Preparation Fees – There are several documents and papers prepared during the home-buying process ranging from the application to the closing. Lenders may charge for this, or the fees may be included in the application and/or attorney’s fees.
Preparation of Amortization Schedule – Some lenders will prepare a detailed amortization for the full term of your mortgage. This is usually done for fixed mortgages or adjustable mortgages.
Land Survey – Lenders may require that the property be surveyed to ensure it has not been encroached and to verify the buildings and improvements to the property.
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.
Lender's 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 homebuyer.
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 of your mortgage loan.
Other Up-Front Expenses
Yes. In most cases you will not have to pay for another appraisal if you change your mortgage company, and depending on the loan program typed, the first lender can transfer it to the new lender. Some appraisal firms may charge a small fee because additional clerical work is required to reflect the new mortgage company; this is called an "Appraisal Retype Fee". The original mortgage company has the right to refuse to transfer the appraisal to another lender. In this case, a new appraisal is needed.
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 business days from the time of your mortgage application, your lender is required to provide you a "Loan Estimate" which is an estimate of settlement or closing costs 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.The Real Estate Settlement Procedures Act (RESPA) contains information regarding the settlement or closing costs you are likely to face. Within 3 business days from the time of your mortgage application, your lender is required to provide you a "Loan Estimate" which is an estimate of settlement or closing costs 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.