Most home buyers and sellers are surprised by costs at their real estate closing. Let’s look at these numbers and explain each in detail.
This fee – also called a loan origination fee – is charged by a lender to cover the process and administration associated with originating a new loan.
It is paid to the lender who initiates and completes the loan transaction when the loan funds. Lender origination fees are calculated as a percentage of the total loan amount.
For instance, if a lender charges a 1% fee for originating a $100,000 loan, the bank or broker will charge $1,000. In some cases (particularly when larger loan amounts are involved or customers are willing to accept a higher interest rate), it is possible to negotiate lower origination fees.
Lender origination fees are often represented as a lump sum on a Good Faith Estimate but can be broken down when a customer wishes to see a more detailed explanation of the charges.
The appraisal is an independent, professional assessment of a home’s size, condition, and quality that establishes its market value.
As part of the mortgage application process, a lender will order the home appraisal but buyers are responsible for paying for the appraisal as part of the closing costs.
Having a home appraised is an important part of the process of applying for a loan or refinancing a mortgage. The appraisal helps the lender ensure that the loan amount requested is appropriate for the property under consideration.
Note: An appraisal differs from an inspection in that a licensed home appraiser will not look for potential defects in a home. Additionally, inspectors are typically hired by buyers directly.
Also known as “discount points,” this optional expense allows buyers to buy down a mortgage interest rate for the purpose of lowering the monthly mortgage payment.
Buying points is a way of paying some interest up front to realize interest savings over the life of the loan – a good idea for buyers who plan to stay in a home for more than a few years.
A point is equal to 1% of the total mortgage amount but the interest rate reduction associated with buying points can vary by lender and by current market conditions. In some cases, new home developers will offer to pay for points as an incentive for potential buyers but there can be limits to how much they can legally contribute.
It always makes sense to compare the cost of a loan with and without points included.
This is the market rate for the administration cost of reviewing, processing, and closing a mortgage loan for the lender.
The closing attorney or settlement agent is responsible for not only completing the transaction between buyer and seller, but also registering the transfer of property with state and local governments and disbursing closing proceeds. They may also be present on the closing date to go through required paperwork with the buyer.
The review of the Purchase & Sale agreement is important because the standard agreement can favor either buyer or seller depending on where the transaction is taking place.
This document is signed roughly two weeks after an offer has been accepted on a home and all relevant inspections have been performed. It outlines the various responsibilities of both buyer and seller in the period leading up to closing.
A real estate attorney can modify the P&S agreement to protect a client’s interests, and many attorneys will offer a discount or complimentary Purchase & Sale review if they perform the closing for the mortgage lender.
This is the cost for an attorney to examine records to determine the legal ownership of a property and submit their findings to the lender.
In most cases, buyers do not see the actual title exam and aren’t informed of the results of the search unless there are issues that will impact the transfer of ownership like liens or other restrictions.
Title searches are frequently conducted before any contracts between sellers and buyers are signed. There are multiple types of title exams but the most common is the full coverage search that involves accessing the official land documents for the property and reviewing each to see how it could impact the potential sale.
Also called a Mortgage Inspection Plan, a plot plan is required by some real estate lenders to show that there are no encroachments or zoning issues and to provide a footprint of the land and the location of structures involved in a sale.
It will also show any easements running through the land, but it is less detailed than a full survey.
Obtaining a plot plan is typically handled by a lender or the closing attorney and is a matter of placing a formal request with the county assessor, public works or community development department, or local planning office. If no existing plot plan can be found, a new survey will need to be conducted.
The municipal lien certificate is a document obtained from Massachusetts cities and towns with tax payment information.
It will list back taxes, pending water charges, and other assessments, ensuring that when a property’s ownership is transferred any money owed to the municipality is paid out of proceeds at closing.
A closing attorney will order an MLC and file it with the Registry of Deeds at closing so the buyer has proof there are no back taxes owed.
If there are taxes owed, the closing attorney is required to collect these from the seller and adjust the current taxes so the buyer is not held responsible for taxes accrued before the date of sale.
Title insurance pricing varies based on the purchase price of the home and the amount of the loan, but the protections it offers against financial loss for buyers, sellers, and lenders are invaluable.
A closing agent will typically choose a title insurer from among the five major title insurance underwriters in the US.
An owner’s policy assures potential buyers that the title is free from liens and encumbrances while also providing coverage from loss should it turn out a title is unmarketable.
Lender’s policies are issued only to mortgage lenders (but are paid for by buyers) and offer a similar kind of coverage while also providing protections related to foreclosures.
If an unexpected issue related to a property’s title comes to light during a sale, title insurance covers the administrative costs of researching and resolving the problem.
Property taxes are due quarterly and are typically paid in advance into an escrow account when property owners have a mortgage.
If the next tax payment is due within 45-60 days of closing, the real estate attorney will collect the appropriate payment for that quarter from the buyer at closing as a separate line item and the initial deposit to the new escrow account will be reduced accordingly.
At closing, the buyer will also reimburse the seller for any property taxes that have been paid for the period starting from the date of the sale.
How much money changes hands will be determined by the settlement agent based on rules created by the IRS – the end result is that both seller and buyer pay property taxes only for the days they actually own the home.
It is the practice of the mortgage industry to collect the first year’s premium at closing or before.
That ensures that a homeowners insurance policy is always paid a full year in advance. When a buyer chooses to escrow for the next year’s homeowners insurance premium, the lender will collect approximately two months’ worth of the premium at closing.
Homeowner’s insurance protects borrower and lender interests and in most cases, lenders will require proof of insurance coverage before they will consider closing.
The amount of coverage required will vary depending on the value of the property and the lender’s own requirements but in general the minimum amount of coverage will pay for the cost of rebuilding a property from the ground up after a disaster.
This is an adjustment for any property taxes that have already been paid by the seller for the remaining tax period after the date of sale.
In some cases, the seller may need to reimburse the buyer for taxes pre-paid for a period during the seller’s ownership.
Prorating an individual’s tax burden is most often done by the settlement agent using standard IRS rules and any tax owed is collected by the agent at closing to ensure that both the buyer and the seller pay taxes only for those days they actually own the property.
Like a tax adjustment, the condo fee adjustment ensures that neither buyer nor seller are required to pay more than their fair share of the monthly common charges at closing.
The monthly condo fee is adjusted on the settlement statement at closing based on the closing date and the buyer reimburses the seller for dues paid for the post-closing period.
At closing there may be adjustments for oil or propane fuel that will be left at the property when it changes hands if this amount has not been previously negotiated.
Many standard purchase and sale agreements include a line item specifically for fuel in storage, however heating oil can be either included in, excluded from, or adjusted for a sale.
To determine the amount of the adjustment, the level of remaining fuel is recorded the day before closing and priced at the day’s rate as determined by local fuel companies.
The cost and fees associated with buying a home are so difficult to understand and track in part because lenders give fees a variety of names, and beyond processing and closing costs there are all kinds of extra fees buyers may be responsible for.
A lot of these costs are rolled into the lender origination fee – for instance, the lender must pay to obtain the buyer’s credit report and that cost is passed onto the buyer, directly or indirectly.
A buyer may not think about the costs to record deed, mortgage and loan documents but they’re there. Working with a real estate attorney can help buyers avoid non-essential fees in many cases.