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As you approach the end of your race to find a home, the finish line is the “closing” or “settlement.” That’s when the deal on your new home finally comes to a close and you own it.
Sounds simple enough, but a lot of moving pieces all have to line up: loan funding, inspections, appraisals, title clearance, recording the change of ownership with the county, insurance coverage and on and on. The final costs to you may be quite different from your lender’s original Loan Estimate, especially attorney or title fees.
How long does closing take?
The closing process really starts when you have a signed purchase and sale agreement. That agreement usually specifies a closing date when the deal will be finished. Expect it to take four to six weeks. This is the time period people mean when they say they are “in escrow.” During that time you’ll be collecting boxes, maybe having a garage sale and starting the fun of packing your stuff while an intricate series of events begins with your real estate agent, the title company and/or real estate attorney, and your lender working to pull it off by the agreed-upon date.
Here’s what’s going on behind the scenes during those weeks:
• The closing agent, either a representative from the title company or an attorney, is crunching the numbers, talking with the seller’s current mortgage holder to get loan payoff amounts, getting instructions from your lender, prorating the property taxes and preparing instructions for you and the seller.
• The title company or a real estate attorney is researching the ownership of the property making sure the seller has the right to sell you the home and you don’t have any surprise liens or disputes.
• The lender is hiring an appraiser, preparing your loan documents and sending them to the escrow company.
• The real estate agents are bird-dogging it all, making sure everyone and everything is moving forward.
Meanwhile, you’ve got some tasks as well during this period:
• Complete your loan application and provide documentation your lender requires.
• Line up your homeowner insurance policy.
• Call utilities to get service set up in your name as of the closing date.
Your contract may call for a final walk-through of the home within 24 hours of closing. If this is the case, your agent should go with you and help mitigate anything that’s not right. Problems at this point could delay closing or mean having the escrow agent hold back money due the seller until repairs are made.
What’s included in “closing costs”?
Not surprisingly, none of the people working behind and in front of the scenes to get your home deal closed works for free. Someone’s got to pay these folks and if they are working on your behalf rather than the seller’s, that someone is probably you. The fees below are what is generally required, but every buyer will not pay every fee listed.
You may have negotiated that some or all of your closing costs to be paid by the seller. Whether that’s the case or you’re footing the entire bill, you probably won’t face all of them because some vary by region and lender. Most are relatively small compared to the overall price of a home. But the list is long and it adds up quickly. Expect buyer’s closing costs to total anywhere from 3 to 5 percent of the sales price. Sellers will pay fewer fees but they are typically larger, including the commission of both buyer’s and seller’s agents, traditionally 3 percent each.
Loan origination fee: This covers the lender’s administrative costs. It’s usually about 1 percent of the total loan but you can sometimes find mortgages with no origination fee. Also, in some areas it is customary for the seller to pay part of this fee.
Loan discount: Also called discount points, this is money you pay upfront to reduce your interest rate. One point is equal to one percent of the loan. But it does not translate to a one percent drop in interest rate – that varies by lender. You need to shop for points like everything else, comparing costs from lender to lender.
Application fee: Not all lenders charge an application fee, but if they do it averages $300, but can be as much as $500.
Appraisal fee: Expect to pay in the neighborhood of $300, depending on your area and the size of the property. The bank will use this money to hire an independent appraiser to look at the home and ensure that it’s worth the money they are loaning you to buy it.
Credit report fee: Expect this to cost about $25.
Lender inspection fee: This is only applicable if you are building a new home or buying one that is still under construction. Cost should be about $100.
Mortgage insurance application fee: When the down payment is less than 20 percent of the purchase price, you are required to carry Private Mortgage Insurance (PMI), to protect the lender should you default on your loan.
Mortgage insurance premium: Some lenders require borrowers to pay their first year’s mortgage insurance premium up front. Other lenders ask for a lump sum insurance premium payment at closing that covers the life of the loan.
Prepaid interest: Most lenders will ask you to prepay any interest that will accrue between closing at the date of your first mortgage payment.
Reserve account funds: Also known as “prepaids,” your monthly mortgage payments will usually include a pro-rated amount to cover payments for property taxes, assessments, homeowners insurance and, if applicable, mortgage insurance. This money is held in a “reserve” or “escrow” account by the lender who makes the payments for you. At closing, your lender may require you to pony up advance payments just to be sure the reserve fund has enough money to pay the bills. The usual requirement two months’ worth of these payments.
Hazard insurance premiums: This is a full year’s worth of premiums to protect the lender from disasters that may befall your home.
Lender’s attorney fee: If the lender involves an attorney in the loan transaction, the buyer can expect to be charged about $400. Some buyers have successfully contested this fee.
Title search: This is done to make sure that there are no unpaid mortgages or tax liens on the property. In most states it can be done by a title insurance company. But a few states require an attorney to conduct the search. Fees vary but expect to pay $200 to $400.
Title insurance fees: This protects you by guaranteeing that the title to the property is clear. There may be a second fee listed on the closing document to cover a separate policy that protects the lender. Cost for this averages 0.5 percent of the purchase price but could go as high as one percent of the purchase price.
Notary fees: A licensed notary public serves as witness that the documents were signed by you. If you’re closing at the title or escrow office, fees for notarization may be waived. Fees are set by each state.
Attorney fees: Some states require an attorney to oversee the closing. In most states, it’s up to you whether to hire your own lawyer. Real estate attorney fees vary. Some charge by the hour with rates ranging from $150 to $350 per hour, while others offer a fixed rate to conduct a real estate closing. Expect to pay $500 to as much as $1,500 if you hire an attorney.
Government recording and transfer charges
There are great differences in the practices of state and local governments. Who pays which of these fees also varies according to the terms negotiated in the sales contact.
Recording fees: It costs at average of $100 to get the sale recorded in the public record.
Transfer taxes: These vary by jurisdiction, but can be significant where they are collected. Some governments also require the purchase of tax stamps.
Other settlement charges
These may or may not be be collected depending on the terms of your contract.
Survey: If your lender requires a survey to establish property lines, expect to pay about $1,000.
Courier fee: Charged if a courier picks up and delivers documents.
Lead-based paint inspection: Covers the cost of evaluating lead-based paint risk.
Pest inspection: Depending on location, a termite or other pest inspection may be required. The seller usually pays for this.
There’s one charge that you should question: Documentation preparation fee. Some lenders and title companies add a documentation preparation fee to cover the costs of preparing final legal papers. Experts call this a “junk fee” that your agent should negotiate away in advance of closing day. On average, the tab is about $200.