Understanding Closing Costs
First Time Home Buyer Information
See also Who Pays For What - Buyer and Seller Costs
You can
generally break down all closing costs into two basic groups:
- Amounts
paid to state and local governments. These include city,
county and state transfer taxes, recordation fees, and prepaid
property taxes.
- Costs
of obtaining a loan or mortgage. These fees include title
insurance, appraisals, credit checks, loan origination and
documentation fees, commitment and processing fees, hazard
and mortgage insurance and interest prepayments.
There
are plenty of fees that you’ll have to pay during the
closing. Many of these costs are actually negotiated during
the offer and counter offer process. All closing costs are
spelled out in the lender’s Good Faith Estimate. If you
want to make sure you are paying the least amount possible
in closing cost fees, you should get at least three Good Faith
Estimates from mortgage lenders. This is only an estimate
and the actual charges may differ. RESPA allows the borrower
to request to see the HUD-1 Settlement Statement that shows
all actual charges imposed on borrower in connection with
the settlement one day before the settlement. If you see a
charge that doesn’t make sense, or that no other lender
has, it’s time to ask questions.
Here’s
an example of what you can expect to pay (some costs vary
widely from state to state, so you should determine exactly
what you will have to pay) :
Property
Inspection - We strongly recommend that every home has
a physical inspection done during the escrow period. A qualified
inspector can find many potential problems early in the process
which allows you to request repairs, request a credit, obtain
further specific inspections, or even back out of the deal.
Inspections generally run between $275 and $450 depending
on the size of the home.
Discount
and Origination Points:
Points
are equal to a percent of the loan amount. 1.00 point is equal
to 1.00% of the loan amount. Discount points represent additional
money you can pay to the lender at closing. If you pay more
points it will lower the interest rate. Usually, for each
point you pay for a 30-year loan, your interest rate is reduced
by about 1/8th (or .125) of a percentage point. Paying points
can be good if you plan on living in the home for a long time.
Origination
Points (or Loan origination fee) charged by the lender
for evaluating, preparing, and submitting a proposed mortgage
loan. Origination fees are often expressed as a percentage.
A one percent loan origination fee is equal to 1% of the loan
amount. Some lenders add origination points into their quoted
points while other lenders add an origination point in addition
to their quoted points.
Application
Fee covers the lender’s cost to process the information
on your loan. Usually, you must pay this charge at the time
you file the application. Some lenders may apply the cost
of the application fee to certain closing costs. Generally
lenders do not refund this application fee if you are not
approved for the loan or if you decide not to take it.
Appraisal
Fee: This fee ($150 to $400 depending on the price of
the home) pays for an independent appraisal of the home you
want to purchase. The lender requires this estimate of the
market value of the house for the loan. Factors to be considered
in determining market value are: present cash value; use;
location; replacement value of improvements; condition; income
from property; net proceeds if the property is sold, etc.
The appraisal is a critical factor in determining how much
of a mortgage the bank or mortgage company will approve. After
the appraisal is completed, the borrower is normally entitled
to a copy of the appraisal from the lender.
Credit
report Fee: Three major national credit bureaus (Equifax,
TransUnion and Experian) supply lenders with the information
on your credit behavior. Consumers typically pay $45 to $55
for this report.
Title
search and title insurance: A title search is a detailed
examination of the historical records concerning a property.
These records include deeds, court records, property and name
indexes, and many other documents. The purpose of the search
is to make sure the buyer is purchasing a house from the legal
owner and there are no liens, overdue special assessments,
or other claims or outstanding restrictive covenants filed
in the record, which would adversely affect the marketability
or value of title.
A title
search can show a number of title defects among these are
unpaid taxes, unsatisfied mortgages and judgments against
the seller. But there are some hidden defects that even the
most diligent title search may never reveal. For instance,
the previous owner could have incorrectly stated his marital
status, resulting in a possible claim by his legal spouse.
Other problems include things like fraud, forgery, defective
deeds, mental incompetence, confusion due to similar or identical
names, and clerical errors in the records. These defects can
arise after you have purchased your home and jeopardize your
right to ownership.
A certificate
of title -- issued by a title company that did the title search
-- offers no protection against any hidden defects in the
title which an examination of the records could not reveal.
A title insurance protects against any tax liens, unpaid mortgages,
or judgments missed in the research of the history of title
on the property. If a claim is made against your property,
title insurance will, in accordance with the terms of your
policy, assure you of a legal defense and pay all court costs
and related fees. Also, if the claim proves valid, you will
be reimbursed for your actual loss up to the face amount of
the policy.
Basically
there are two different types of policies - a lender's policy
and an owner's policy. The lender's policy protects the lender's
interest in the property as security for the outstanding balance
under the buyer's mortgage. The owner's policy safeguards
the buyer's investment or equity in the property up to the
face amount of the policy. The cost of the policy is usually
based on the loan amount.
It is
required to obtain a lender's title insurance policy only.
If you also desire the protection of title insurance you should
purchase a buyer's title policy. This is a one time premium,
and usually the cheapest rate might be offered by the company
that did the title search. It is also advisable to inquire
about the seller's title insurance policies on the property,
for it may be possible for you to obtain a policy at a lower
reissue rate.
Escrow
Account: Most lenders require you to pay for some items that
will due after closing. These prepaid items usually include
insurance premiums (for Homeowners Insurance -- also called
Hazard, or Fire Insurance -- and Private Mortgage Insurance)
and Real Estate Taxes. The HUD regulations limit the amount
of money a lender may require the borrower to hold in an escrow
account.
Flood
Certification: Some homes require flood certification fees,
amounting up to $30. It verifies that the property is not
in a flood zone. If the property is located within a defined
zone the lender will require a flood insurance policy.
Recording
and Transfer Charges: A small fee (to $50 to $150) to cover
the cost of the paperwork required to record your home purchase.
Interim
interest: Accrued interest from closing date until the end
of the month.
In addition
South Bay Brokers charges a $250 document compliance fee which
covers all of the paperwork, and has SBBI staff copy and scan
all documentation and provides a CD after close of escrow.
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