Closing Costs and Hidden Fees
Closing costs are the innumerable fees and taxes associated with purchasing and taking ownership of a home. They include searches, clearances, and reports to process the transaction. Depending on where you live and the complexity of your transaction, they can easily add up to thousands of dollars. They're generally around 3 percent to 6 percent of the purchase price of the home.
They really shouldn't be "hidden" -- your lender is required to give you a written, good-faith estimate of all your closing costs within three days of your applying for a loan. However, don't go into the process of buying a home without knowing about them.
Points or loan origination fees. This is an up-front payment of the interest that you owe your lender. The range that you'll have to fork over is anywhere from nothing to about 3 percent of the loan. Remember, the more points you pay, the lower your overall interest rate should be, and vice-versa. If you're strapped for cash, you can get a loan with no points, but you'll pay a higher amount over the life of your loan. Another option is to have the seller pay these costs for you. Ask your buyer broker about broaching the subject with the sellers.
Escrow fees. These are the fees that are charged to process all of the paperwork and keep the money in a safe place while you and the seller dicker over things. Depending on the cost of your home, this can amount to a few hundred to a couple of thousand dollars.
Homeowners insurance. We discuss this in detail in our section called Refinancing, Home Equity and Insurance. For now, though, know that you should expect to pay between $500 to $2,000 depending on the value of your home and your coverage. You must get this insurance before your lender will release the funds for your house.
Title insurance. What would happen if, six months after you move into your new house, you discover that the person who sold you the house didn't really own it? Arrgh! While it's a remote possibility, it does occasionally happen. Luckily, there's protection against this very problem. Your lender will want you to get "title insurance" to take care of this situation should it arise. Based on the value of your home, expect to pay between $500 to $2,000.
Depending on when your purchase actually closes, you may owe the previous owners for taxes that they've already paid. For example, say the old owners paid their taxes from January through June. You buy the house in April. Well, they've already paid for your taxes for May and June. You need to reimburse them for this expense. In addition you may need to prepay some taxes.
Legal fees. You may not need a lawyer. Ask your buyer broker if she feels that the transaction is complicated enough to hire one. Frequently, home transactions just use boilerplate forms for everything. If this is the case, you will save money.
Private mortgage insurance. We've talked about this one earlier. If you have a loan that requires it, count on paying at least a few months premiums in advance. Some lenders will want you to pay for an entire year. You can nix this if you can come up with a 20 percent down payment.
Notary. Yes, someone has to swear that you are who you say you are. Expect to pay about $50 for the privilege.
Document prep fees. Lender and/or broker fees.
Appraisal fees. To give your home a fair market value.
Factual credit report fee. A verified credit report.
Tax service fees. To ensure your taxes are paid each year.
Survey fee. This may be waived sometimes if an existing survey can be used.
Pest inspection fee. If your house is new, this can be waived.
State recording fees. As your state requires.
Irving. At every closing there's this guy named Irving. He always wants anywhere from $20 to a couple of thousand dollars for the trouble of showing up. Sometimes, he doesn't even show up. He just sends a letter saying. "Pay me now or you can't have your house!" Irving can represent the municipal tax office, which says you have to pay an obscure tax for buying a blue house on Tuesday. Or he could represent the courier company demanding payment to rush some last minute document across town. In any case, expect Irving to come up with some other off-the-wall charge that you haven't anticipated.
We're almost ready to move to closing. But there are a few things you'll need to get in order before we do. We have cleverly named this next step "pre-closing."
Once your offer is accepted, your financing is in place, and your home inspection is completed, you're ready to do the deal, that is, to close. Before that actually takes place, though, you need to get a few things in order.
You need to get insurance set up for your new home a couple of days before you go to closing. Since the insurance company requires a couple of days to secure the policy, you should take care of this at least a week before closing. At that time, you arrange for an appraisal to be sent to the insurance company. You can either bring it in yourself or have your loan officer do it. However, keep in mind that it's ultimately your responsibility, so make sure that it happens.
On what will the cost of insurance be based? On the age of the home and its construction, its appraised value, and whatever choices you make in terms of deductibles and other choices that will be offered to you. Needless to say, you should shop around for the best insurance deal.
Once the insurer has the appraisal in hand and has set up a policy for you, you'll need to go in with a check for the amount for the first year. Your policy will be written so as to become effective on the closing date. You hand over your check and sign an application, and the company gives you a declaration page (showing your policy number, the coverage that you have, who owns the house, the address, how much it costs for the year) and a receipt showing that you paid. These are items that you need to bring to closing. The insurance company also generally faxes a copy of these two documents to the loan officer or settlement attorney.
A Fat Check
No, we're not talking about your weight. We're talking about a cashiers check, and it's going to be a whopper. It will comprise the down payment on your loan, plus closing costs (including attorney's fees, courier's fees, and so on, all broken down on the settlement sheet). The earnest money deposit will be subtracted from this amount, since you've already ponied up that cash.Pre-Closing: The Walk-Through
On the day of closing, or the day before, the purchaser is allowed a walk-through of the property. All plumbing, electrical, heating, air conditioning -- all the major systems of the house -- have to be "in working order." Otherwise it is the seller's responsibility to get them up to scratch. You've already had the home inspection, of course, so there should be no major surprises here. However, that doesn't mean that there won't be. So take your time on your walk-through, even though you'll feel a natural urge to get this thing out of the way so that you can take possession of your house.
If it's summertime, turn on that air conditioner and make sure that the air that comes out is cold. And yes, even it's summer time, turn on the heat. Make sure the air is hot. Likewise in winter. Make a special point of this: Test out the systems that you would not normally use during the current season. You'll regret not doing that come January, when your teeth are chattering and icicles are forming on the end of your nose.
Just so you know, a potential snag can occur with the phrase "in working order." What exactly does that mean? If the air conditioning doesn't feel cold enough to you, but it does to the seller, then who's right?
The answer, for you, is: you. You're right. If anything isn't working, you need to bring it up right away with the seller. Say what you think. Don't let someone persuade you that the 90-degree air coming out of the duct is really cool. If this is going to result in a dispute with the seller, so be it. The two of you will either work it out, or you won't. But at least you won't be kicking yourself for having been bullied.
If everything is working, proceed to closing.
The big day is here! You're officially a homeowner. You're going off to "settle" the deal, to "close" on your new home. In this section we'll tell you who needs to be present at the closing and what to expect.Who will be there?
You, the buyer, will be present, along with your team, which likely includes your real estate agent and your settlement attorney. If you have an especially amiable and service-oriented mortgage broker, he may be there on your behalf as well, though that is unlikely.
On the other side of the table will be the seller(s), the seller's agent, and possibly an attorney for their team.How long will this take?
This depends on how smoothly things go. It's likely to take about one hour for you to sign all the paperwork. (This is another reason that you do not want to go into something like this without some help. If you've bought the house without a real estate agent, you definitely want a good settlement attorney to be with you before and during closing.)
If there are surprises (see below) at closing, it will take longer.What do you need to bring?
You're probably working with an agent, so he or she will be of help here. You'll need to have in hand your new homeowner's insurance policy, showing that you have, indeed, insured the house, and a cashiers check.
The settlement sheet is a document that lists all of the closing costs and the particulars of your loan. If you'd like a preview of a settlement sheet, the Department of Housing and Urban Development (HUD) has conveniently put one online.The Passing of the Baton
The seller is advised not to cancel homeowner's insurance until recordation has occurred, which is to say, the sale of the house has officially been recorded at city hall. This usually takes place within 24 hours of the sale.
The buyer, meanwhile, is advised that he should have his homeowners policy activated immediately (but you already arranged this, didn't you?) and he "takes possession" upon the completion of closing. What does "take possession" mean? It means the house is yours. It means that, after you've signed all these documents, the seller (or someone from the seller's team) is going to place the keys to the house in your hands. Congratulations!
At this point, the seller (or builder, if it's a new house) gives you whatever package of information he may have on equipment at the house. This includes things like the instruction booklet for the washing machine; information on how that timer-light above the front door works; how you re-code the automatic garage door opener; how-to manuals for the refrigerator and the food disposal. You get the idea ?everything you need to work and service and understand all of the major appliances of the house.What can go wrong?
The good news is that an overwhelming majority of closings occur without a problem.
Things can, however, go wrong. Sometimes the loan that was supposedly approved wasn't, because the lender comes in with terms with which the purchaser cannot comply. Buyers have been known to show up at closing anyway, in the hope that the seller will reduce the price in order to close. That may even happen: The seller may have purchased another home and will be willing to take less money in order for the deal to go through. On the other hand, it may well not.
Another possible snafu is that the title information comes back and reveals that the house has a lien against it that no one knew about. Real estate agents have stories of "husbands" and "wives" who show up, who aren't in fact married (the true spouse isn't there because, say, they're in the middle of a divorce, and one person is trying to sell the house out from under the other.) Most states now require photo identification at the time of settlement from all parties involved. A husband and wife may show up having been married for two days, and the credit check on the woman may show that she has eight aliases and is wanted in Montana for sheep rustling. In this case, the loan will have been turned down.
These scenarios, while they do exist, are not likely.
However, be sure to take the responsibility to examine the paperwork and examine it well. Ask whoever is handling the closing to explain it to you. You should be as prepared as possible for this transaction. Now is not the time to be shy or afraid of "looking stupid" by asking a question.
If all goes well, then you are now the proud owner of a home. Congratulations! Celebrate!
And then start thinking about the joys and responsibilities of ownership.