Know Your Closing Costs
In addition to the down payment, you will pay fees for loan processing and other closing costs. These fees must be paid in full, usually with a cashier’s check or wire transfer at the time of the closing unless you are able to include some of them in your financing. Fees for an appraisal, credit report, home inspection and other services will have been paid before the closing. Typically, closing costs will range from 3%–5% of your loan amount. Fees commonly paid at the closing include:
- Loan origination fees: Many lenders charge an “origination fee” of approximately one point, or 1% of the loan amount.
- Points: If your loan includes other points, they will also be due at closing.
- Title insurance.
- Environmental Protection Agency (EPA) endorsement on the property.
- Title company fees.
- Attorney fees.
- Prepaid mortgage interest, property taxes, and insurance. If your down payment is less than 20%, your lender may require that you pay the first year’s premium for private mortgage insurance (PMI) up front, usually about .073% of the loan amount. The first year’s premiums for homeowner’s insurance are due at closing, as well as prorated mortgage interest to the end of the month of sale and prorated property taxes.
- Transfer taxes and recording fees for the city and county.
RESPA: Real Estate Settlement Procedures Act
The RESPA (Real Estate Settlement Procedures Act) was passed by Congress in 1974 for the purpose of protecting consumers.
RESPA Affords the Following:
- Prohibits real estate professionals from receiving referral fees and kickbacks for services they did not actually perform.
- Requires detailed disclosures that describe settlement costs, escrow account summaries, procedures and practices, and services provided by lenders.
- Requires the disclosure of relationships and affiliations between all settlement services involved in a transaction. Borrowers are required to receive these disclosures at predetermined times throughout the transaction. For example, lenders are required to provide borrowers with “Good Faith Estimates” for the costs associated with their services at the time a loan application is taken.
What Loans are Covered by RESPA?
- Residential one-to-four unit properties that are secured with a mortgage.
- The majority of home improvement loans, assumptions, refinances, homes equity loans, and lines of credit are subject to RESPA and are enforced by the Department of Housing and Urban Development (HUD).
Disclosures a Lender Must Make at the Time of a Loan Application
Mortgage Servicing Disclosure. This informs the buyer of the lender’s possible intentions of selling the loan to another lender, or if the lender typically services the loan themselves. This also details the company’s history in selling or obtaining the loans.
Good Faith Estimate (GFE). An estimate of the various settlement costs associated with a loan. Estimated charges and cost the buyer will pay at the closing table are detailed. However, actual costs vary, as it may be difficult to estimate precise costs. GFE discloses information about lender requirements of using a specific settlement provider. To insure the GFE is as accurate as could be, a borrower should provide the lender all information that is asked in connection to the loan.
Presentation of forms at the time of application. In the event the lender fails to provide these forms at the time of application, they must, within three days, mail them to the borrower. The lender is under no obligation to provide these documents in the event the loan is denied.
Disclosures Provided Prior To Closing
Affiliated business arrangement disclosures. When a realtor, lender, or another participant in the settlement process refers a borrower to an affiliate this must be disclosed to the borrower prior to closing. This disclosure states that you are not required to use the services of the affiliate, and may seek another provider if you so desire.
Disclosures Provided at the Time of Settlement
- HUD-1 Settlement Statement. Details the actual charges that occur at the closing table.
- Initial Escrow Statement. Details insurance prepaid, taxes collected, and other amounts held in escrow by the lender. This statement is to be delivered by the lender within 45 days of closing.
- Annual Escrow Statement. This summarizes escrow payments, which are made for the year, and discloses what course of action will be taken in regards to account shortages or surpluses.
At your closing appointment, you will meet with a representative from the title company, the seller’s attorney, and potentially the seller and their realtor. The title company will have all necessary documents prepared, such as the new deed of trust on the property (which gives the lender the right to sell the property if you fail to make the payments) and a promissory note (evidence that you are personally responsible for repaying the loan) required by the lender, so all you have to do is read and sign them.
You will be required to pay the down payment at this time, so remember to bring a cashier’s check or schedule a wire transfer in the necessary amount, made payable to yourself. You will then endorse the check to the title company. Also bring payment, as specified by the title company, for paying incidental closing costs. The entire process usually takes about two hours, after which the property is legally yours.