Closing is the final stage in a real estate purchase/sale transaction wherein various items are finalized, loose ends tied up, and the title is transferred from the owner to the buyer. In most cases, this involves two major aspects of the transaction: signing real estate documents and paying various closing costs.
What Are Closing Costs?
What Are Closing Costs?
Closing costs are monetary amounts that are paid during the closing portion of the real estate sale or transaction. Before the title can be conveyed to the purchaser, all closing costs must be paid off. These are basically costs that are accrued outside of or in addition to the actual sales price of the home or property.
Why are Closing Costs Necessary?
Why do you have to pay closing costs? It’s very likely that you’re already paying a down payment or another type of deposit to show good faith. You may already have a sizable mortgage payment for the foreseeable future.
The answer is, real estate transactions are complex and involve many moving parts. Some states require various inspections beyond the basic home inspections for which you may directly pay a home inspector. Property taxes, transfer taxes, insurance coverage, and various other additional fees that are required will be discussed below.
What Fees Can I Expect at Closing?
Closing costs typically constitute anywhere from 2 to 5 percent of the sales purchase price. Closing costs can include fees and other costs such as:
- Attorney fees, brokerage commissions, and other costs paid to professionals: These costs pay for attorneys to review documents on behalf of a buyer or a lender.
- Appraisal and inspection fees: This cost is paid to an appraisal company to evaluate the fair market value of a home.
- Application fees: This fee covers the cost for a lender to process your application. This fee commonly covers credit checks for your credit score. Not all lenders charge an application fee, and this cost can often be negotiated. Before submitting an application, talk to your lender what this fee covers.
- Courier fees: These fees cover the cost of transporting documents to complete your loan transaction in the fastest manner possible.
- Flood Coverage: Third-party companies are usually hired to determine whether a property is located in a flood zone. If the property is found to be located within a flood zone, you will have to purchase flood insurance to be paid separately.
- Home Inspections: You will likely need to get your home inspected to verify the condition of the property and check for home repairs that may be needed before your home can close.
- Home Owners Association Transfer Fees: Sellers typically pay for this transfer, which shows that HOA dues are paid current, what the dues are, the association’s financial statements, and notices. Buyers should review these documents thoroughly to see whether there are any assessments, legal actions, or other items that may be of concern.
- Homeowner’s Insurance Fees: These fees cover potential damages to your home. Typically, your first year of homeowner’s insurance is paid at the time of closing.
- Lead-Based Paint Inspections: These fees cover the cost of professionally evaluating the potential for lead-based paint risk.
- Pest Inspection Fees: These fees cover the cost of inspecting for dry rot, ants, termites, and other pests. Pest inspections are required by some states. Some government loans also require pest inspections. Damage caused by termites, dry rot, or other wood damage can be expensive.
- Property Taxes: Lenders typically want any taxes due within 60 days of purchase by the loan servicer to be paid at the time of closing.
- Recording Fees: Recording fees are charged by local city or county recording offices for the recording of public land records.
- Survey Fees: Fees generally go to survey companies to verify that all property lines are accurate. Survey companies check for shared fences along the property line. Land surveys are not required by all states.
- Title Company Title Search Fees: These fees are paid to title companies for doing thorough searches of property records. Once a title company has researched the deed to your home, they will be able to ensure that no one else has a claim to your property.
- Various tax-related costs and costs related to pro-rate issues.
Closing costs may apply to either the seller or the purchaser depending on the factors.
How Do I Learn What the Closing Costs Will Be?
During the initial stages of negotiation for the property transaction, the seller must provide a “good faith estimate” (GFE) to the buyer. This is a document listing the total costs that may be required at the end of closing. It includes various fees, services, etc. The actual cost at closing will of course be different, but the GFE is intended to give the buyer an estimate of the total costs.
During the closing process, a document must be signed and filled out by both parties, which is called the “settlement statement” (HUD-1). This form lists all the different closing costs, fees, expenses, and charges. It may also contain instructions on how the costs and loans are to be addressed in terms of payments.
Discrepancies over closing costs can often be resolved through the finalizing of the HUD-1. The closing costs can often fluctuate in the thousands of dollars from the good faith estimate up to the settlement statement.
How Can Home Buyers Avoid Closing Costs?
Upfront fees on your loan can be avoided by getting no-closing cost mortgages. With these types of mortgages, you won’t have to pay any of the closing costs when you close on the mortgage.
However, loans like these may cost you in the long run. A lender may charge a higher interest rate on a loan in exchange for not paying closing costs. The lender may wrap the closing fees into the total mortgage owned. In either case, you may end up paying interest on closing costs.
Homeowners can negotiate with sellers over who pays closing costs. In some cases, the seller will agree to pay the buyer’s closing fees.
Should I Compare Fees From Lender to Lender?
It’s wise to compare lenders, third-party services, homeowners insurance companies, and title companies. Many potential homebuyers don’t realize they can save large amounts of money on closing costs if they compare fees from lender to lender. You don’t have to use the title company, pest inspector, or homeowners insurance agents that your lender suggests. Save yourself some money by doing some comparison.
Should I Hire a Lawyer for Help with Closing Cost Issues?
Closing costs are an important aspect of any real estate transaction. It is in your best interests to hire a qualified real estate lawyer in your area if you need any assistance with a real estate transaction. Your attorney can provide you with legal advice and guidance during the negotiation and closing processes. Also, if you encounter any disputes, your attorney can provide you with legal representation in court if needed.
By using the link here, you can view LegalMatch’s entire database of real estate attorneys for free. LegalMatch’s services are 100% confidential. By narrowing down your search, you can find an experienced attorney in your area for no cost.
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