Closing costs are expenses above the price of the property. Both the buyer and seller incur some of these expenses when transferring ownership of a property. Who actually pays, however, depends on local custom and what the buyer or seller negotiates. Closing costs normally include title insurance, loan points, escrow or closing day charges, property taxes, and document fees. The lender provides an estimate of closing costs for prospective homebuyers.
Common Closing Costs for Buyers
The lender must disclose a good faith estimate of all settlement costs. A check to cover your closing costs will probably have to be a cashier’s check. The title company or other entity conducting the closing will tell you the required amount for:
- Down payment
- Loan origination fees
- Points, or loan discount fees, you pay to receive a lower interest rate
- Appraisal fee
- Credit report
- Private mortgage insurance premium
- Insurance escrow for homeowners insurance, if being paid as part of the mortgage
- Property tax escrow, if being paid as part of the mortgage. Lenders keep funds for taxes and insurance in escrow accounts as they are paid with the mortgage, then pay the insurance or taxes for you.
- Deed recording fees
- Title insurance policy premiums
- Survey
- Inspection fees—building inspection, termites, etc.
- Notary fees
- Prorations for your share of costs, such as utility bills and property taxes
A Note About Prorations : Because such costs are usually paid on either a monthly or yearly basis, you might have to pay a bill for services used by the sellers before they moved. Proration is a way for the sellers to pay you back or for you to pay them for bills they may have paid in advance. For example, the gas company usually sends a bill each month for the gas used during the previous month. But assume you buy the home on the 6th of the month. You would owe the gas company for only the days from the 6th to the end for the month. The seller would owe for the first five days. The bill would be prorated for the number of days in the month, and then each person would be responsible for the days of his or her ownership.
What to Keep From Your Closing
1. The Real Estate Settlement Procedures Act (RESPA) statement. This form, sometimes called a HUD 1 statement, itemizes all the costs associated with the closing. You’ll need this for income tax purposes and when you sell the home.
2. The Truth in Lending Statement summarizes the terms of your mortgage loan.
3. The mortgage and the note (two pieces of paper) spell out the legal terms of your mortgage obligation and the agreed-upon repayment terms.
4. The deed transfers ownership of the property to you.
5. Affidavits swearing to various statements by either party. For example, the sellers will often sign an affidavit stating that they have not incurred any liens on the property.
6. Riders are amendments to the sales contract that affect your rights. For example, if you buy a condominium, you may have a rider outline the condo association’s rules and restrictions.
7. Insurance policies provide a record and proof of your coverage.
For the Seller: What You’ll Net at Closing
To find out how much money you’ll net from your house, add up your closing costs and subtract them from the sale price of the house.
Closing Costs for Sellers
Mortgage payoff and outstanding interest
Prorations for real estate taxes
Prorations for utility bills, condo dues, and other items paid in arrears
Closing fees charged by closing specialist
Title policy fees
Home inspections
Attorney’s fees
Survey charge
Transfer tax or other government registration fees
Brokerage commission
10 Steps to Prepare for Homeownership
1. Decide how much home you can afford. Generally, you can afford a home equal in value to between two and three times your grossincome.
2. Develop a wish list of what you’d like your home to have. Then prioritize the features on your list.
3. Select three or four neighborhoods you’d like to live in. Consider items such as schools, recreational facilities, area expansion plans, and safety.
4. Determine if you have enough saved to cover your downpayment and closing costs. Closing costs, including taxes, attorney’s fee, and transfer fees average between 2 percent and 7 percent of the home price.
5. Obtain a copy of your credit report.
6. Determine how large a mortgage you can qualify for and explore different loans options to decide for the best one.
7. Organize all the documentation a lender will need to pre approve you for a loan.
8. Do research to determine if you qualify for any special mortgage or downpayment-assistance programs.
9. Calculate the costs of homeownership, including property taxes, insurance, maintenance, and association fees, if applicable.
10. Find an experienced REALTOR® who can help you through the process.
