UNDERSTANDING CLOSING COSTS

SALES/BROKER COMMISSION:  THIS IS THE TOTAL DOLLAR AMOUNT OF THE REAL ESTATE BROKER’S SALES COMMISSION, WHICH IS USUALLY PAID BY THE SELLER.  THIS COMMISSION IS TYPICALLY A PERCENTAGE OF THE SELLING PRICE OF THE HOME.

ITEMS PAYABLE IN CONNECTION WITH THE LOAN:  THESE ARE THE FEES THAT LENDERS CHARGE TO PROCESS, APPROVE AND MAKE THE MORTGAGE LOAN:

• LOAN ORIGINATION:  THIS FEE IS USUALLY KNOWN AS A LOAN ORIGINATION FEE BUT SOMETIMES IS CALLED A “POINT” OR “POINTS.”  IT COVERS THE LENDER’S ADMINISTRATIVE COSTS IN PROCESSING THE LOAN.  OFTEN EXPRESSED AS A PERCENTAGE OF THE LOAN, THE FEE WILL VARY AMONG LENDERS.  GENERALLY, THE BUYER PAYS THE FEE, UNLESS OTHERWISE NEGOTIATED.

• LOAN DISCOUNT:  ALSO OFTEN CALLED “POINTS” OR “DISCOUNT POINTS.” A LOAN DISCOUNT IS A ONE-TIME CHARGE IMPOSED BY THE LENDER OR BROKER TO LOWER THE RATE AT WHICH THE LENDER OR BROKER WOULD OTHERWISE OFFER THE LOAN TO YOU.  EACH “POINT” IS EQUAL TO ONE PERCENT OF THE MORTGAGE AMOUNT.  FOR EXAMPLE, IF A LENDER CHARGES TWO POINTS ON AN $80,000 LOAN THIS AMOUNTS TO A CHARGE OF $1,600.

• APPRAISAL FEE:  THIS CHARGE PAYS FOR AN APPRAISAL REPORT MADE BY AN APPRAISER.  THIS IS AN OUT OF POCKET EXPENSE TO THE BUYER PAID AT THE TIME OF LOAN APPLICATION.

• CREDIT REPORT FEE:  THIS FEE COVERS THE COST OF A CREDIT REPORT, WHICH SHOWS YOUR CREDIT HISTORY.  THIS IS AN OUT OF POCKET EXPENSE TO THE BUYER PAID AT THE TIME OF LOAN APPLICATION.

• LENDER’S INSPECTION FEE:  THIS CHARGE COVERS INSPECTIONS, OFTEN OF NEWLY CONSTRUCTED HOUSING, MADE BY EMPLOYEES OF YOUR LENDER OR BY AN OUTSIDE INSPECTOR. 

• MORTGAGE INSURANCE APPLICATION FEE:  THIS FEE COVERS THE PROCESSING OF AN APPLICATION FOR MORTGAGE INSURANCE.

• ASSUMPTION FEE:  THIS IS A FEE WHICH IS CHARGED WHEN A BUYER “ASSUMES” OR TAKES OVER THE DUTY TO PAY THE SELLER’S EXISTING MORTGAGE LOAN.

• MORTGAGE BROKER FEE:  ADDITIONAL FEES PAID TO MORTGAGE “BROKERS.”

ITEMS REQUIRED BY LENDER TO BE PAID IN ADVANCE:  YOU MAY BE REQUIRED TO PREPAY CERTAIN ITEMS AT THE TIME OF SETTLEMENT, SUCH AS ACCRUED INTEREST, MORTGAGE INSURANCE PREMIUMS AND HAZARD INSURANCE PREMIUMS.

• INTEREST:  LENDERS USUALLY REQUIRE BORROWERS TO PAY THE INTEREST THAT ACCRUES FROM THE DATE OF SETTLEMENT TO THE FIRST MONTHLY PAYMENT.

• MORTGAGE INSURANCE PREMIUM:  THE LENDER MAY REQUIRE YOU TO PAY YOUR FIRST YEAR’S MORTGAGE INSURANCE PREMIUM OR A LUMP SUM PREMIUM THAT COVERS THE LIFE OF THE LOAN, IN ADVANCE, AT THE SETTLEMENT OR IT COULD BE FINANCED INTO THE LOAN AMOUNT.

• HAZARD INSURANCE PREMIUM:  HAZARD INSURANCE PROTECTS YOU AND THE LENDER AGAINST LOSS DUE TO FIRE, WINDSTORM, AND NATURAL HAZARDS.  LENDERS OFTEN REQUIRE THE BORROWER TO BRING TO THE SETTLEMENT A PAID-UP FIRST YEAR’S POLICY OR TO PAY FOR THE FIRST YEAR’S PREMIUM AT SETTLEMENT.

• FLOOD INSURANCE:  SOMETIMES YOUR LENDER REQUIRES FLOOD INSURANCE.

ESCROW ACCOUNT DEPOSITS:  THIS IDENTIFIES THE PAYMENT OF TAXES AND/OR INSURANCE AND OTHER ITEMS THAT MUST BE MADE AT SETTLEMENT TO SET UP AN ESCROW ACCOUNT.  THE LENDER IS NOT ALLOWED TO COLLLECT MORE THAN A CERTAIN AMOUNT.  THE INDIVIDUAL ITEM DEPOSITS MAY OVERSTATE WHAT CAN BE COLLECTED.  IF SO, THE AGGREGATE ADJUSTMENT MAKES THE CORRECTION ON LINE 1008 OF THE HUD-1 STATEMENT SHEET.  IT WILL BE ZERO OR A NEGATIVE AMOUNT.

TITLE CHARGES:  TITLE CHARGES MAY COVER A VARIETY OF SERVICES PERFORMED BY TITLE COMPANIES AND OTHERS.  YOUR PARTICULAR SETTLEMENT MAY NOT INCLUDE ALL OF THE ITEMS BELOW OR MAY INCLUDE OTHERS NOT LISTED.

• SETTLEMENT OR CLOSING FEE:  THIS FEE IS PAID TO THE SETTLEMENT AGENT OR ESCROW HOLDER.  RESPONSIBILITY FOR PAYMENT OF THIS FEE SHOULD BE NEGOTIATED BETWEEN THE SELLER AND THE BUYER.

• ABSTRACT OF TITLE SEARCH, TITLE EXAMINATION, TITLE INSURANCE BINDER:  THE CHARGES ON THESE LINES COVER THE COSTS OF THE TITLE SEARCH AND EXAMINATION.

• DOCUMENT PREPARATION:  THIS IS A SEPARATE FEE THAT SOME LENDERS OR TITLE COMPANIES CHARGE TO COVER THEIR COSTS OF PREPARATION OF FINAL LEGAL PAPERS, SUCH AS A MORTGAGE, DEED OF TRUST, NOTE OR DEED.

• NOTARY FEE:  THIS FEE IS CHARGED FOR THE COST OF HAVING A PERSON WHO IS LICENSED AS A NOTARY PUBLIC SWEAR TO THE FACT THAT THE PERSONS NAMED IN THE DOCUMENTS DID, IN FACT, SIGN THEM.

• ATTORNEY’S FEES: YOU MAY BE REQUIRED TO PAY FOR LEGAL SERVICES PROVIDED TO THE LENDER, SUCH AS AN EXAMINATION OF THE TITLE BINDER.  OCCASIONALLY, THE SELLER WILL AGREE IN THE AGREEMENT OF SALE TO PAY PART OF THIS FEE.  THE COST OF YOUR ATTORNEY AND/OR THE SELLER’S ATTORNEY MAY ALSO APPEAR HERE.  IF AN ATTORNEY’S INVOLVEMENT IS REQUIRED BY THE LENDER, THE FEE WILL APPEAR ON THIS PART OF THE FORM, OR ON LINES 1111, 1112, OR 1113.

• TITLE INSURANCE:  THE TOTAL COST OF OWNER’S AND LENDER’S TITLE INSURANCE IS SHOWN HERE.

• LENDER’S TITLE INSURANCE:  THE COST OF THE LENDER’S POLICY IS SHOWN HERE.

• OWNER’S (BUYER’S) TITLE INSURANCE:  THE COST OF THE OWNER’S POLICY IS SHOWN HERE.

GOVERNMENT RECORDING AND TRANSFER CHARGES:  THESE FEES MAY BE PAID BY YOU OR BY THE SELLER, DEPENDING UPON YOUR AGREEMENT OF SALE WITH THE SELLER.  THE BUYER USUALLY PAYS THE FEES FOR LEGALLY RECORDING THE NEW DEED AND MORTGAGE.  TRANSFER TAXES, WHICH IN SOME LOCALITIES ARE COLLECTED WHENEVER PROPERTY CHANGES HANDS OR A MORTGAGE LOAN IS MADE, CAN BE QUITE LARGE AND ARE SET BY STATE AND/OR LOCAL GOVERNMENTS.  CITY, COUNTY, AND/OR STATE TAX STAMPS MAY HAVE TO BE PURCHASED AS WELL.

ADDITIONAL SETTLEMENT CHARGES: 

• SURVEY:  THE LENDER MAY REQUIRE THAT A SURVEYOR CONDUCT A PROPERTY SURVEY.  THIS IS A PROTECTION TO THE BUYER AS WELL.  USUALLY THE BUYER PAYS THE SURVEYOR’S FEE, BUT SOMETIMES THIS MAY BE PAID BY THE SELLER.

• PEST AND OTHER INSPECTIONS:  THIS FEE IS TO COVER INSPECTIONS FOR TERMITES OR OTHER PEST INFESTATION OF YOUR HOME.

• LEAD BASED PAINT INSPECTIONS:  THIS FEE IS TO COVER INSPECTIONS OR EVALUATIONS FOR LEAD-BASED PAINT HAZARD RISK ASSESSMENTS.

ADJUSTMENTS TO COSTS SHARED BY BUYER AND SELLER:

• AT SETTLEMENT IT IS USUALLY NECESSARY TO MAKE AN ADJUSTMENT BETWEEN BUYER AND SELLER FOR PROPERTY TAXES AND OTHER EXPENSES.  THE ADJUSTMENT BETWEEN BUYER AND SELLER ARE SHOWN IN SECTIONS J AND K OF THE HUD-1 SETTLEMENT STATEMENT.  FOR EXAMPLE, IF THE TAXES, WHICH ARE PAYABLE ANNUALLY, HAD NOT YET BEEN PAID WHEN SETTLEMENT OCCURS ON JULY 1, THE BORROWER WILL HAVE TO PAY A WHOLE YEAR’S TAXES ON THE FOLLOWING DECEMBER 1.. HOWEVER, THE SELLER LIVED IN THE HOUSE FOR THE FIRST SIX MONTHS OF THE YEAR, THUS, ONE HALF OF THE YAR’S TAXES ARE TO BE PAID BY THE SELLER.  THE BORROWER IS GIVEN CREDIT FOR THIS AMOUNT AT THE SETTLEMENT AND THE SELLER WILL PAY THIS AMOUNT OR COUNT IT AS A DEDUCTION FROM SUMS PAYABLE TO THE SELLER. 

• SIMILAR ADJUSTMENTS ARE MADE FOR HOMEOWNER ASSOCIATION DUES, SPECIAL ASSESSMENTS, AND FUEL AND OTHER UTILITIES, ALTHOUGH THE BILLING PERIODS FOR THESE MAY NOT ALWAYS BE ON AN ANNUAL BASIS.  BE SURE YOU WORK OUT THESE COST SHARING ARRANGMENTS OR “PRORATIONS” WITH THE SELLER BEFORE THE SETTLEMENT.  YOU MAY WISH TO NOTIFY UTILITY COMPANIES OF THE CHANGE IN OWNERSHIP AND ASK FOR A SPECIAL READING ON THE DAY OF SETTLEMENT, WITH THE BILL FOR PRE-SETTLEMENT CHARGES TO BE MAILED TO THE SELLER AT HIS OR HER NEW ADDRESS OR TO THE SETTLEMENT AGENT.  THIS WILL ELIMINATE CONUFSION THAT CAN RESULT IF YOU ARE BILLED FOR UTILITES USED WHEN THE SELLER OWNED THE PROPERTY.