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.
Fact
Number 1:
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.
Fact
Number 2:
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.
These include title search,
title insurance, related
legal fees, and fees for
conducting the settlement.
- Amounts
paid to state and local
governments.
These include city, county
and state transfer taxes,
recordation fees, and prepaid
property taxes.
- Costs
of getting a mortgage.
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.
Let's
examine them one by one.
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.
Imposed by your lender,
this charge covers the initial
costs of processing your
loan request and checking
your credit report.
- Appraisal
Fee.
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.
- Survey.
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.
- Loan
Origination Fees and 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 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.
- Mortgage
Insurance.
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.
- Homeowner's
& Hazard Insurance.
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.
Settlements
are conducted by lending institutions,
title insurance companies, escrow
companies, real estate brokers,
or attorneys. In most cases,
whoever conducts the settlement
is providing a service to the
lender. You may be required
to pay for related legal services
provided to the lender. You
can also retain you own attorney
to represent you at all stages
of the transaction including
settlement.
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 page 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.
This
page has been prepared to help
you make the important decisions
involved in buying and financing
your home. Because real estate
settlement practices vary depending
in state law and local custom,
the information contained in
this brochure should not be
viewed as a replacement for
professional advice. Talk with
mortgage lenders, real estate
agents, attorneys, and other
advisors for information about
lending practices, mortgage
instruments, and your own interests
before you commit to a specific
loan.
2465
E. Orangethorpe Ave.
Fullerton, CA 92831
Phone: (714) 992-66355
Fax: (800) 449-4041
California Real Estate License
# 01138374 |