During the home buying and selling process, you will find there are many different costs and fees that are encountered. (Buying or selling real estate involves many companies and individuals, including the buyer and seller, escrow, title, notary, home owner association (HOA) / management companies, attorneys, and bankers, which include the loan officer(s), loan committees, underwriters and many others. Also involved, but not limited to, are home inspectors, termite inspectors, repairpersons, courier services, and, if necessary, mold inspectors.) The costs will vary but, a good rule of thumb is that, not including any commissions paid to the Realtor(s), fees can equal approximately 1.5% of the purchase/selling price. Again, costs will vary, but this should give one a good idea of the time and cost it takes to marshall everyone in the direction of closing the transaction. To see an estimate of much you could pay for closing costs, click here.
Note that some of these costs may be negotiable with the opposite party. This is where having a reputable real estate agent with good negotiating skills becomes critical: they can help negotiate some of the costs, such that the other party pays some or all of them. The below is merely a basic outline of anticipated closing costs; actual costs will vary. Depending on prior negotiations, the buyer and/or the seller are responsible for the below costs. (Fees vary from state to state, region to region, and company to company. ALWAYS delineate EVERYTHING in writing prior to signing a contract. Remember: it's not the spirit of the law but the letter of the law that applies to real estate.)
Where are closing costs spelled out? In the lenderís 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. The Real Estate Settlement Procedures Act known as RESPA allows the borrower to request to see the HUD-1 Settlement Statement, which will show all actual charges imposed on borrower in connection with the settlement one day before the settlement. If you see a charge that doesnít make sense, or that no other lender has, itís time to ask questions.
In a purchase transaction the party responsible for paying the big ticket closing costs, the title, escrow fees and transfer taxes, is determined contractually (refer to your purchase contract). Typically, the party who pays is based upon the custom of the county in which the property is located. For example, one counties custom may require that the buyers of the property pay the title, escrow fees and transfer taxes, while another may require the seller to cover the expenses and yet another may require that the fees be split 50-50. (In Orange County, it is customary for both the buyer and the seller to pay their respective escrow fees (50-50 split).) When purchasing new construction and you are working with a builder, the builder may or may not pay your title, escrow fees and transfer taxes regardless of the county custom (depending upon prevailing market conditions). It is important to first know the custom of the county in which you are buying and to refer to your purchase contract to determine the fees you are responsible for and have agreed to pay.
You can divide all closing costs into two basic groups:
- Amounts paid to state and local governments: These include city, county and state transfer taxes, recording fees, and prepaid property taxes.
- Costs of obtaining a mortgage: These include title insurance, survey, appraisals, credit checks, loan origination and documentation fees, commitment and processing fees, hazard and mortgage insurance and interest prepayments.
Payments to local governments should be the same at every lender. So should fees for appraisals, credit reports and title insurance. Total costs you can expect to pay are from 3% to 6% of the amount of your mortgage loan.
The cost of a mortgage loan goes beyond your rate and points paid. Often there are fees associated with a mortgage loan application that are collected throughout the process. Check with your lender as to whether they charge a mortgage loan application fee.
At the beginning of the application process, you'll receive a Good Faith Estimate of loan costs. As its name states, it is a 'good faith' or as accurate as the information provided at the start of the loan process. You'll also receive a Truth in Lending Disclosure - be sure to read this document as it contains regulatory information.
Typical costs include:
Loan Origination Fee - Covers the lender's administrative costs of processing the loan. It may be expressed as a percentage
of the loan (for example, 1% of the home loan amount).
Points - A lender fee. Each point you pay equals 1% of the home loan amount, so for a $100,000 loan, 1 point equals
$1,000. In many cases, points are tax-deductible (ask your tax advisor).
Application / Processing / Underwriting Fees - Are fees charged by the lender to cover the cost of completing the application, processing the loan, evaluating
the risks involved, analyzing the file, and establishing conditions.
Document Preparation and Signing Fees - A fee charged by the lender for preparing all the documents required for the
closing of a loan. A minimal fee may apply for the added convenience of signing your documents when and where you want to (including your home or office) -
eliminating a trip to the Credit Union.
Third Party Fees -- Fees charged by the third party vendors, such as an appraiser, escrow and title. Most all lenders typically require some of these fees to be paid by the borrower.
Appraisal Fee - This fee is for a determination of the value of a property. A report is prepared by a professional, licensed appraiser to explain the determination of the fair market value. Typically, the appraisal fee is paid by the buyer (borrower). The appraisal becomes the property of the lender, even though the buyer paid for it. Appraisal costs typically run less than $500 for residential real estate.
Credit Report Fee - Some institutions charge for the cost of the credit report that is used to help determine your creditworthiness. These reports are obtained from credit agencies that display your history of paying debts. This fee is often paid for at the time of application for a home loan.
Mortgage Insurance - Often called Private Mortgage Insurance or PMI, this is an insurance policy that protects the lender against loss should you fail to make payments. This type of insurance is typically required on loans with less than a 20% down payment. (This is becoming more rare since, if the buyer has a less-thank 20% downpayment available, many loans are now structured with both a first and second mortgage so as to avoid PMI charges. NOTE: PMI is NOT automatically dropped by lenders. If your equity/loan ratio is greater than 80% and you have PMI, you must request that PMI be removed.)
Flood Determination Fee - Covers the Federal Emergency Management Agency's (FEMA) review to determine if a home is located in a flood zone and if flood insurance is required.
Closing/Escrow Fee - Pays for the services of the escrow agent.
Abstract or Title Search - This fee cover the costs associated with a written history of the title transactions involving the parcel of land where a home is located, including everything recorded in the public record. The search checks for liens, unpaid claims, restrictions or other issues.
Title Insurance - The premium for title insurance, which protects you and the lender in case of an unresolved claim affecting the title to the property. See ALTA/CLTA for additional information on Title Insurance policies.
Homeowner/Hazard Insurance - This fee involves a premium for a form of insurance policy required to protect against certain risks, such as fires. A regular payment for this insurance can typically be included in your monthly home loan payment through an escrow or impound account. The cost of the first year's policy can be paid at closing out of loan proceeds.
Recording Fees and Transfer Tax - Are charged by most states and localities for recording the purchase and refinance documents, any liens on public record and transferring ownership of the property.
Notary Fee - Covers the cost of having a licensed notary public certify the signing of your closing documents and signature.
Survey Fee - A fee for the certification of the location of the property, its dimensions, boundaries, contour, and the location and dimensions of any improvements. In some cases, the lender can use the original survey done for the purchase of the property.
Inspection Fees - Charges for the various inspections that may be required for the sale, such as property, pest and septic tank inspections.
Pre-paid Interest - When you buy a home, you typically don't make the first payment until the beginning of the second full month after your loan closes. For example, if your loan closes on May 28, your first payment will be due on July 1. However, in this example, you pay at closing for the interest on your new loan from the day of closing until June 1.
Escrow Accounts - Escrow or "impound" accounts are required if you finance over 80% loan to value (LTV). This account is used to pay your property taxes and all insurances as they become due. Your lender sets up the escrow account by collecting 1 to 2 months' worth of the annual cost of your homeowner's insurance and any other insurances due on the home and 1-2 months' worth of your yearly property taxes and any other items covered by your escrow account. At closing, you'll be required to pay these amounts to fund the account.
Property Taxes - Property taxes for real estate in California must be paid semi-annually to the tax collector and are due on November 1 and February 1. (Click here for Orange County Tax Collector information.) Property taxes are the most common expense prorated (shared or split) between the buyer and seller. Your closing agent will typically determine your portion of the taxes from the date of closing. This varies by state.
The above should give you an idea of what to expect in closing fees throughout the home buying process. Please check with your real estate agent and mortgage lender for more specific costs that will be associated with your home purchase.
Any closing costs listed above are general in nature and are NOT reflective of actual dollar amounts. Please check with each individual service provider to confirm service fees.
Title & Escrow Fees
Include both the owner's and the lender's policy of title insurance as well as the escrow fee. Title insurance protects both the buyer and lender by insuring a clear chain of title, that the persons with the legal right to convey title to your property are the ones who have actually done so. Also, some polices protect against the occurrence of fraud and forgery.
The escrow fee is a service fee charged by the title company for acting as an independent third party in facilitating your transaction and insuring that all
parties to the transaction perform as contractually agreed to.
Other title fees include the fee to notarize your loan documents (the notaryfee) the fee required to record your deed of trust with the county recorder's
office (the recording fee), as well as miscellaneous drawing, courier and express mail fees.
You may call the title company handling your purchase, provide them with the purchase price and loan amount you're requesting and they can supply you with an
accurate fee quote based on the specifics of your transaction.
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The flat fees that a lender charges to process and fund your loan fall under a variety of names and can generally be lumped into one category the industry
refers to as "garbage fees". They include: underwriting, processing, administrative, document preparation and funding fees. Additional lender fees
include wire, tax service fees and flood certification fees. These fees are charged by virtually all lenders and range from approximately $650-$850 in total
fees charged. Information generously provided by Erate.com. Click for information on no closing cost refinance mortgages.
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Points generally fall into two categories, discount fees and origination fees. Discount fees are prepaid interest that a borrower elects to pay up front to buy
down the interest rate down on the loan. An origination fee is also used to buy the interest rate down but is used to compensate the loan originator in the
transaction, rather than accepting a higher interest rate where the lender funding your loan compensates the loan originator. A point is equivalent to 1%
of the loan amount (i.e. one point on a $300,000 loan is $3,000).
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The fee an appraiser will charge to inspect your property will depend on the type of property involved (i.e. single family vs. duplex to fourplex) and
whether the property will be owner occupied or used as an investment property. The typical fee for a standard owner occupied single family tract home,
condominium or townhouse is $300-$400. An investment property typically requires a rental survey and operating income statement to be completed with the
appraisal and can add an additional $200-$300 to the cost of the appraisal. Also, if you are purchasing new construction, the appraiser may have to return
to the property an additional time to complete a final inspection (referred to as a 442), to insure that construction has been completed as proposed. This fee
might amount to an additional $75-$100.
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The fees to check your credit (using three credit bureaus as lenders require) range from $25-$65 per person or per married couple. If your credit report has
many inaccuracies on it, the costs to correct the errors could generate higher fees from the credit reporting company.
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If you are buying a property that does not have a homeowner's association (HOA) which carries a master policy of homeowner's or hazard insurance, you will need to shop for such a policy on your own. The lender will require that a policy of homeowner's or hazard insurance be in place at the time the loan funds. The usual coverage requirement is for replacement cost coverage but this could vary amongst lenders. If your property is located in a geological hazard zone (i.e. quake or flood zone) the lender
will ask that you have policies in place to cover these hazards as well.
Geological hazard zones are established by FEMA and the appraiser can determine whether your property is located in such a zone by referring to the most current FEMA geological hazard map. The real estate agents handling the transaction as well as the seller of the property should be aware of any hazard zone
Check with the insurance carrier or agent of your choice for a homeowner's or hazard insurance quote as well as a quote for quake coverage if you require it. Contact The National Flood Insurance Program at 800-638-6620 for a flood insurance quote if this coverage is needed.
Primary Mortgage Insurance (PMI) may be required on your loan if only one lender is financing in excess of 80% of the value or purchase price of the home (LTV ratio is greater than 80%). This fee can be charged as a lump sum fee at closing or can be financed on a monthly basis. Mortgage insurance can also be avoided by choosing an 80-10-10 or 80-15-5 down payment strategy (see down payment options for further details).
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In addition to property taxes, which are pro-rated at closing between the buyer and the seller, there are additional taxes which may be due at the time of sale.
They include both county and city transfer taxes. Like title and escrow fees, the party responsible for paying the transfer taxes will be determined contractually and are typically based on county custom (although not all counties and cities assess transfer fees). Refer to your purchase contract to determine if they are required and who is responsible for paying them.
Once you have determined that the fees are required, you may contact your title company for a transfer tax quote. The taxes are based on the purchase price of
the property and can range from $1.10 per $1,000 in purchase price for county transfer taxes and $3.30 per $1,000 for city transfer taxes. For example a home with a $300,000 purchase price would owe county transfer taxes of $330 and city transfer taxes of $990.
Miscellaneous Closing Costs
Your home inspection is a closing cost, even if you pay it before your settlement date. So are radon tests, pest inspections and other specialized inspections you perform at the property.
Payments for home warranties are another common closing cost. Typically, the seller purchases a one-year home warranty plan for the buyer.
Arrangements for closings vary. In some states you will pay an attorney to do a title search, apply for title insurance for both you and your lender and perform the actual closing. In other states, the title work is handled by specialty companies and closings take place in varied locations. (In California, there are separate title companies,
Your closing agent might charge you a notary fee to have loan documents notarized. You'll pay a recording fee to have the new deed and other documents recorded in public records. You might also pay an overnight fee to send documents to the lender and a wire transfer fee for incoming or outgoing funds.
You might pay a one-time impact fee, sometimes called a transfer fee, if you are buying a home or condo in a housing development. You'll also pay your share
of the development's annual association fees.
You probably won't pay all of the closing costs I've mentioned, but there might be additional fees that you will need to plan for, so ask your lender, your real estate agent and your closing agent for an estimate of expenses you can expect to pay when you buy real estate in your area.
The costs of closing a real estate transaction generally include the following: Title & escrow fees, lender fees, points (an optional expense), appraisal fees, credit fees, insurance and taxes.
In a purchase transaction the party responsible for paying the big ticket closing costs, the title, escrow fees and transfer taxes, is determined contractually (refer to your purchase contract). Typically the party who pays is based upon the custom of the county in which the property is located. For example, one counties custom may require that the buyers of property pay the title, escrow fees and transfer taxes while another may require the seller to cover the expenses and yet another may require that the fees be split 50-50. When purchasing new construction and you are working with a builder, the builder may or may not pay your title, escrow fees and transfer taxes regardless of the county custom (depending upon prevailing market conditions). It is important to first know the custom of the county in which you are buying and to refer to your purchase contract to determine the fees you are responsible for and have agreed to pay.
Hereís 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):
Discount and Origination Points:
Points are equal to a certain percent of the loan amount; e.g. 1 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 lenderís 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, but the appraisal is actually the property of the lender, even though the buyer paid for it.
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, but we are allowed one free a year from AnnualCreditReport.com.
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.
In California, there are two different types of title policies in California: California Land Title Association (CLTA) and American Land Title Association (ALTA). The ALTA policy includes unrecorded mechanic's liens, assessments, encumbrances, encroachments, easements, water rights, mining claims, patent reservations, conflicts of boundary lines, shortages in area access to and from the land and other visible matter. The cost of the policy(ies) are usually based on the loan amount.
Survey fee: The title insurance company or lender may require a survey of the property. This is to verify official boundaries of the property and that your lot has not been encroached upon by any structures. Depending on the size of the property and what state you live in, this is a variable cost; please contact your title company to inquire as to the cost.
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.
Documentary stamp tax on the mortgage varies from state to state and about 35 cents per $100 borrowed.
Interim interest: Accrued interest from closing date until the end of the month.
Usually an application fee, credit report fee and the appraisal fee will have to be paid when you submit the mortgage application. These costs can be negotiable, so consult with your Realtor and lender.
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