What Are Closing Costs?
When selling your home “For Sale by Owner” (aka FSBO), your lender usually prepares a “Good Faith Estimate” of closing costs. You are entitled to receive this estimate no later than three business days after you apply for a loan. Because it is an estimate of the costs you may incur, it may not contain all potential costs. The lender will not know what all of the costs are going to be. The “Good Faith Estimate” will be an estimate based on previous experience. Actual closing expenses usually exceed the estimate. To avoid problems, go prepared to pay more than the amount listed on your estimate.
If you are comparing two lenders, look only at the costs charged by the lender. Lenders can only make educated guesses about the charges made by others.
You will receive an itemization of costs you may have to pay when you buy your home. The costs are listed in the order that they should appear on a Good Faith Estimate you obtain from a mortgage lender.
There are two broad categories of closing costs. Non-recurring closing costs are items that are paid once and you never pay again such as loan origination fees, recording fees, survey fees, etc. Recurring closing costs are items you pay again over the course of home ownership, such as property taxes and homeowner’s insurance.
Closing costs are usually made up of the following:
1. Attorney’s or escrow fees (yours and your lender’s if applicable)
2. Property taxes (to cover tax period to date)
3. Interest (paid from date of closing to 30 days before first monthly payment)
4. Loan origination fee (covers lender’s administrative costs)
5. Recording fees
6. Survey fee
7. First premium of mortgage insurance (if applicable)
8. Title insurance (yours and your lender’s)
9. Loan discount points
10. First payment to escrow account for future real estate taxes and insurance
11. Paid receipt for homeowner’s insurance policy (and fire and flood insurance if applicable)
12. Any documentation preparation fees.
On closing day, you’ll present your paid homeowner’s insurance policy or a binder and receipt showing that the premium has been paid. The closing agent will then list the money you owe the seller (remainder of down payment, prepaid taxes, etc.) and then the money the seller owes you (unpaid taxes and prepaid rent, if applicable). The seller will provide proofs of any inspection, warranties, etc.
Once you’re sure you understand all the documentation, you’ll sign the mortgage, agreeing that if you don’t make payments the lender is entitled to sell your property and apply the sale price against the amount you owe plus expenses. You’ll also sign a mortgage note, promising to repay the loan. The seller will give you the title to the house in the form of a signed deed.
You’ll pay the lender’s agent all closing costs and, in turn, he or she will provide you with a settlement statement of all the items for which you have paid. The deed and mortgage will then be recorded in the state Registry of Deeds, and you will be a homeowner.
At closing, you will get:
1. Settlement Statement
2. HUD-1 Form (itemizes services provided and the fees charged; it is filled out by the closing agent and must be given to you at or before closing)
3. Truth-in-Lending Statement
4. Mortgage Note
5. Mortgage or Deed of Trust
6. Binding Sales Contract (prepared by the seller; your lawyer should review it)
7. Keys to your new home
Your Settlement Costs are going to consist of the following:
1. Sales/Broker’s Commission: This is the total dollar amount of the real estate broker’s sales commission, which is usually paid by the seller. This commission is typically a percentage of the selling price of the home.
2. Items Payable in Connection with Loan: These are the fees that lenders charge to process, approve and make the mortgage loan.
3. Loan Origination: This fee is usually known as a loan origination fee but sometimes is called a “point” or “points.” It covers the lender’s administrative costs in processing the loan. Often expressed as a percentage of the loan, the fee will vary among lenders. Generally, the buyer pays the fee, unless otherwise negotiated.
4. Loan Discount: Also often called “points” or “discount points,” a loan discount is a one-time charge imposed by the lender or broker to lower the rate at which the lender or broker would otherwise offer the loan to you. Each “point” is equal to one percent of the mortgage amount. For example, if a lender charges two points on a $80,000 loan this amounts to a charge of $1,600.
5. Appraisal Fee: This charge pays for an appraisal report made by an appraiser.
6. Credit Report Fee: This fee covers the cost of a credit report, which shows your credit history. The lender uses the information in a credit report to help decide whether or not to approve your loan and how much money to lend you.
7. Lender’s Inspection Fee: This charge covers inspections, often of newly constructed housing, made by employees of your lender or by an outside inspector.
8. Mortgage Insurance Application Fee: This fee covers the processing of an application for mortgage insurance.
9. Assumption Fee: This is a fee which is charged when a buyer “assumes” or takes over the duty to pay the seller’s existing mortgage loan.
10. Mortgage Broker Fee: Fees paid to mortgage brokers would be listed here. A CLO fee would also be listed here.
11. Interest: Lenders usually require borrowers to pay the interest that accrues from the date of settlement to the first monthly payment.
12. Mortgage Insurance Premium: The lender may require you to pay your first year’s mortgage insurance premium or a lump sum premium that covers the life of the loan, in advance, at the settlement.
13. Hazard Insurance Premium: Hazard insurance protects you and the lender against loss due to fire, windstorm, and natural hazards. Lenders often require the borrower to bring to the settlement a paid-up first year’s policy or to pay for the first year’s premium at settlement.
14. Flood Insurance: If the lender requires flood insurance, it is usually listed here.
15. Title Charges: Title charges may cover a variety of services performed by title companies and others. Your particular settlement may not include all of the items below or may include others not listed.
16. Settlement or Closing Fee: This fee is paid to the settlement agent or escrow holder. Responsibility for payment of this fee should be negotiated between the seller and the buyer.
17. Abstract of Title Search, Title Examination, Title Insurance Binder: The charges on these lines cover the costs of the title search and examination.
18. Document Preparation: This is a separate fee that some lenders or title companies charge to cover their costs of preparation of final legal papers, such as a mortgage, deed of trust, note or deed.
19. Notary Fee: This fee is charged for the cost of having a person who is licensed as a notary public swear to the fact that the persons named in the documents did, in fact, sign them.
20. Attorney’s Fees: You may be required to pay for legal services provided to the lender, such as an examination of the title binder. Occasionally, the seller will agree in the agreement of sale to pay part of this fee. The cost of your attorney and/or the seller’s attorney may also appear here. If an attorney’s involvement is required by the lender.
21. Title Insurance: The total cost of owner’s and lender’s title insurance is shown here.
22. Lender’s Title Insurance: The cost of the lender’s policy is shown here.
23. Government Recording and Transfer Charges: These fees may be paid by you or by the seller, depending upon your agreement of sale with the seller. The buyer usually pays the fees for legally recording the new deed and mortgage (line 1201). Transfer taxes, which in some localities are collected whenever property changes hands or a mortgage loan is made, can be quite large and are set by state and/or local governments. City, county and/or state tax stamps may have to be purchased as well
24. Survey: The lender may require that a surveyor conduct a property survey. This is a protection to the buyer as well. Usually the buyer pays the surveyor’s fee, but sometimes this may be paid by the seller.
25. Pest and Other Inspections: This fee is to cover inspections for termites or other pest infestation of your home.
26. Lead-Based Paint Inspections: This fee is to cover inspections or evaluations for lead-based paint hazard risk assessments.
27. Total Settlement Charges: The sum of all fees in the borrower’s column entitled “Paid from Borrower’s Funds at Settlement” is placed here. This figure is then transferred to line 103 of Section J, “Settlement charges to borrower” in the Summary of Borrower’s Transaction on page 1 of the HUD-1 Settlement Statement and added to the purchase price. The sum of all of the settlement fees paid by the seller are transferred to line 502 of Section K, Summary of Seller’s Transaction on page 1 of the HUD-1 Settlement Statement.
Don’t be overwhelmed by all of the fees and charges. Your closing agent will go over each item one line at a time.