What to expect at closing

August 26, 2010 | 4 Comments

By Marilyn Lewis of MSN Real Estate

What to expect at closing (© Rob Daly/Getty Images)

You’re finally wrapping up your home purchase. Congratulations. Before it’s officially yours, though, you have one last hurdle: the mysterious process known as “closing” or “settlement.” Open your wallet and hold onto your hat.

“Closing costs” — the catch-all term for a host of fees, taxes and charges — can total 2% to 6% or more of your purchase price — $4,000 to $12,000 on a $200,000 mortgage. That means you’ll need to budget a chunk of money besides your down payment.

Costs vary by region and by what you negotiate. Buyers usually pay most fees, but sellers may pay some, too. Buyers often get lenders to contribute, too. Be aware, however, that lenders offering a “zero-closing-cost” loan usually charge a higher interest rate.

Closing starts when you sign a purchase contract. It ends about four to eight weeks later, at a closing meeting (or conference) where you sign papers on your loan; pay fees, taxes and services to finalize the sale; and receive the keys and deed to your new home.

Who’s in charge?
A professional settlement agent orchestrates a closing. The agent files documents, pays taxes on your behalf, ensures every task is done and recorded in the time specified by law, and also may hire an appraiser, pest inspector and other professional services. The agent represents the buyer, the seller and the lender equally.

In some states, the agent must be an attorney. In others, it’s an independent settlement or escrow company. (An escrow company is one licensed by the state to hold money and documents.) In many states, title companies — whose primary job is to make sure there are no claims on the property and to sell insurance guaranteeing that the title is clear — may be the settlement agent.

States’ requirements vary:

  • In New York, only an attorney — usually a specialized “closing attorney” — oversees a closing.
  • In Nevada, as in most states, title companies act as the settlement agent.
  • In California and Wyoming, escrow companies are used.

The federal forms and rules used to disclose your loan costs and closing fees, however, are identical in every state:

  • Your lender must give you a binding good-faith estimate (.PDF file), or GFE, within three business days after you apply for a loan. It shows loan costs and estimates your other closing costs. Your final origination charges and transfer taxes can’t vary from this estimate. Quotes for other services may vary by up to 10%. Bigger variations are a “tolerance violation” and the lender must credit you the difference within 30 days of your closing, says Cathy Blaszyk, vice president for lender services at Closing.com.
  • At your closing, the settlement agent will give you a HUD-1 form (.PDF file) showing your final costs. The chart on page 3 helps you compare the good-faith estimates with your final charges.

How to shop
Closing costs vary greatly. In its 2009 survey of average total closing costs in 52 cities and states, Bankrate.com found a $1,579 difference between the highest-cost state, Texas, at $3,855, and Nevada, with the lowest average cost, $2,276.

Most of these fees are negotiable, and you can shop separately for many of them.

“The consumer has to open their eyes, because they can save a lot of money,” Blaszyk says. “People spend more time shopping for a big-screen TV.” Closing.com’s closing costs calculator lets you plug in home-purchase information to get numerous estimates and quotes on closing services from providers near you.

By shopping aggressively, you might:

  • Qualify for a better interest rate than you’d expected.
  • Find that a loan offer with a higher interest rate is really the best deal when all closing costs are considered.
  • Spot “junk” fees.
  • Find lower rates on services such as title insurance, settlement services or inspections.
  • Use these lower bids to negotiate better prices with your lender.

Start shopping for settlement services and for additional loan offers once you’ve made one mortgage-loan application. A lender must stick to its good-faith estimate for 10 days. “The bank or broker can’t go back and make changes, which gives the borrower a chance to make comparisons,” says Jeanne Stell, head of compliance for Allied Home Mortgage Capital Corp., a lending company.

Don’t worry about hurting your credit score by making numerous loan applications. In “4 credit-scoring myths,” personal finance guru and MSN Money contributor Liz Pulliam Weston says that your FICO score will register multiple inquiries in a 45-day period as just one inquiry. Applying is free, except maybe for the cost of pulling your credit report — about $15, tops. Lenders can’t collect application or appraisal fees while you’re comparison shopping.

Although recent changes in federal law make it harder for lenders to pad fees, you should still get expert help in reviewing offers and closing documents. “The key is getting somebody who is trained and who can comprehensively look at it for you,” says Debra Pogrund Stark, a professor and real-estate law expert at John Marshall Law School in Chicago.

In advance, line up either of these:

Closing fees  — a guide
There are three basic types of closing costs:

  • Lender fees.
  • Government fees and taxes.
  • Fees from companies and providers for other services required to close your transaction.

We used cost estimates from Bankrate.com’s 2009 state-by-state map of closing costs, the site’s 2007 survey for a $200,000 mortgage loan (click on your state for a detailed breakdown) and the Federal Reserve’s estimate of closing costs.

Here are the fees that can’t be negotiated:

  • Any Department of Housing and Urban Development or Veterans Affairs funding fees.
  • Taxes and government charges.
  • Many third-party services, such as an appraisal or credit report.
  • Title insurance rates; these don’t vary much, and in some states, rates are regulated.
  • Flood certification.

1. Lender fees
All lender fees are bundled into GFE line 1: “Origination fee.”

To compare costs, everything you need to know is at the bottom of page 1 on a GFE, says Brian Sullivan, HUD spokesman. “If you compare origination charges and total settlement charges, it’s going to be crystal clear which loan is cheapest,” he says.

If you want to delve deeper, request explanations for each fee. They go by many names: administration, document preparation, processing, notary public, courier services and flood certification. Be dubious of vague categories or multiple fees with mysterious titles, such as a “loan tie-in” fee or a “sub-escrow” fee, mortgage insurance application fees and fees for “processing,” “commitment,” “application,” administration,” “document preparation,” “origination” and “underwriting.”

Bankrate.com found that, in 2007, buyers on average paid lenders $565 in “commitment” fees, $187 in “document preparation” fees, $370 in “processing” fees and $246 in “underwriting” fees — all of which Bankrate columnist Steve McLinden calls highly negotiable “junk” fees.

Lenders tend to inflate origination fees to protect themselves from variations in their final costs, Blaszyk says. That means there’s room for a well-prepared buyer to negotiate.

  • Reserve costs (GFE Section 9; HUD-1 lines 900 through 1007): Your first mortgage payment isn’t due for six to eight weeks, so you may need to fund a reserve account to cover interim expenses — real-estate taxes, interest, homeowners and mortgage insurance premiums — for that period.
  • Origination fee (GFE: Line 1): This is the lender’s charge for receiving and processing your application and for underwriting, or approving, it. It may also include the cost of the appraisal ($325, on average) and other third-party services. Average cost: $2,130 to $3,105 with a 5% down payment; $1,984 to $2,865 with a 10% down payment.
  • Broker fee (GFE: Line 1): Your loan broker, if you use one, earns a commission (typically 1% of the loan amount), included among “origination charges.”
  • Points (GFE: Line 2): You can usually buy down your interest rate by purchasing “points” (or “loan discount” fees.) You pay an upfront fee in exchange for a lower rate. Consider this if you’ll hold the loan for several years. Do the math to figure out how long you must hold the loan to make the purchase worthwhile. Cost: One point costs 1% of your mortgage amount. (Example: Buying three points on a $200,000 mortgage costs $6,000.)
  • Adjusted origination charges (GFE page 2, line 2): Sometimes the lender also pays the broker a bonus for selling you a more expensive loan. It’s called a yield-spread premium.A yield spread premium isn’t identified on government forms. “It is a true hidden cost,” Stark says.This item is confusing; the forms are the product of negotiations between the mortgage industry and government. “It was incomprehensible to me,” Stark says. But here’s what you need to know: If your GFE shows a “credit” (“You receive a credit of ___ for this interest rate of ___%. This credit reduces your settlement charges”), you’re almost certainly paying for a yield spread premium through a higher interest rate, HUD spokesman Brian Sullivan says.The Federal Reserve has recently banned yield-spread premiums based on interest rates, effective April 1, 2011.

2. Government fees (GFE lines 7 and 8)
State and local government fees — including transfer fees, recording fees and property taxes — can be negligible or cost up to 3% of your loan amount.

  • Transfer taxes. Municipal, state and even county governments often tax a transaction. Cost: For one example (from DirtLawyer.com), a property sale in Alameda County, Calif., is charged a county tax of $1.10 per thousand dollars in addition to a city tax of from $4.50 to $15 per thousand dollars. In some counties, the buyer pays; in others, the seller pays; in some, buyer and seller split costs.
  • Property tax. Assessed by counties; rates vary widely. Cost: Ask your county assessor’s office for local rates.
  • Recording fees:  Charged by state and local governments. Cost: $50 to $150.

3. Fees for third-party services (GFE page 2, “Your Charges for All Other Settlement Services”)

  • Settlement agent: Some settlement companies bundle several services at one price, a possible source of savings. Cost: Varies with services provided. (Read the Federal Reserve’s explanation of all-in-one services.)
  • Attorney: When shopping, ask for a flat (one-time) rate. Cost: $343, on average.
  • Title search and title insurance: Cost: Varies by state or county. Americans paid $707, on average, in 2007 for title insurance, plus about $200 for title search and other title services.
  • Property survey: Defines and records the property’s boundaries. Cost: $135, on average.
  • Homeowners (hazard) insurance: You must purchase homeowners insurance to obtain a mortgage. Cost: $300 to thousands of dollars per year, depending on the home’s value and the coverage you select.
  • Private mortgage insurance: Required by the government if your down payment is less than 20% of the purchase price. Cost: $50 to $80 per month, on average, for a $159,000 home, according to Mortgage Insurance Companies of America.
  • Inspections (well, septic system, pool, radon, pest, environmental hazards): Cost: $50-$300 per inspection.
  • Flood determination fee: If your home is in a flood plain, you may be required to purchase flood insurance. Cost: The fee to determine if you’re in a flood plain runs $12-$16, on average. Insurance is additional.

Source: www.MSNRealEstate.com


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