Real Estate Terminology: Closing Costs, the Fourth in a Series
Closing costs include all of the fees and costs associated with completing the sale or purchase of a home using a mortgage, that are in addition to the actual cost of the property itself. These costs are due at the "close" of the deal, with the disbursal of loan monies, transfer of deed and completion of other final paperwork and are included on your HUD-1 settlement statement. Some of these costs go to the lender and some to third-party participants. Since many different costs may be included at closing, we'll separate these out for you.
What costs are included at closing?
Although costs can very by state or locality, in general they can include:
- Activation fee: (see Points)
- Application fee: a fee charged by the lender to cover the cost to process loan information.
- Appraisal fee: the fee charged by the qualified appraiser for completing the appraisal report (estimating the market value). Appraisal fees may be a fixed amount or based on a percentage of the estimated value of the property.
- Attorney fees: a real estate closing attorney coordinates and reviews the documentation required to complete a real estate transaction including the payoff of existing mortgages, examining the title, reviewing loan documents, filing government forms and a myriad of other actions required before the deal is closed, and explaining all of these documents to the buyer. For these services, the attorney charges certain fees.
- Credit report fees: as part of the mortgage approval process, lenders request a credit report. Since the agency creates a credit report work at the time of the request, the fee for this report is due regardless of whether or not a loan actually is disbursed.
- Documentation fees: fees real estate brokerages may charge for preparing documents for both the buyer and the seller.
- Escrow deposits: an escrow is a separate account established to hold the monies associated with a real estate transaction prior to and after closing. These can include the earnest (money deposited to show the seller good faith), seller payments toward closing, prepaid private mortgage insurance and property taxes. The escrow company releases the funds as the required transaction is completed.
- Escrow fees: the fees charged by the escrow company to set up and maintain escrow accounts and pay out the monies when require may be combined into the term "escrow fees". These can also include wire transfer fees, legal documentation preparation fees, notary fees, demand order fees and the like.
- Flood title certification fee: mortgages made to homes in a flood zone may have specific requirements. If a title search specific to flood zones is required, there may be a separate fee. Homes located in flood zones require a flood insurance policy.
- Inspection fees: often, a real estate transaction includes a home inspection. This fee, charged by the company completing the inspection, may be a flat fee, based on square-footage or the amount of time required to inspect the home.
- Loan origination fees: (see Points)
- Pest infection control fees: a certified pest inspector checks for termite and carpenter ant activity and submits an inspection report. A lender may require pest mitigation in order to complete the loan process. Either the buyer or seller may pay fees associated with the inspection. Pest mitigation and associated fees might be included as part of the closing requirements.
- Points: In simple terms, a "point" is one percent of the total amount of a mortgage loan. There are several types of points connected to loans, but the two most common are origination points and discount points.
Origination points are the fees as a percentage of the loan charged by a mortgage broker for the service of processing the loan, also known as loan origination fees or activation fees.
Discount points are a form of prepaid interest borrowers may purchase to decrease the interest amount on future payments. For each 1% of the loan amount (point) the borrower pays, the lender lower the interest rate by an agreed upon percentage.
- Recording fee: the municipality or government agency (county clerk, etc.) responsible for recording the transfer of ownership charges a fee for completing this paperwork.
- Survey fees: the title company may require a survey to determine the exact size and boundaries of the property.
- Taxes and insurance: during the closing process, property taxes and homeowners insurance fees are prorated to cover the time between closing and the first mortgage payment due (or for period specified by the lender) and collected in advance. Escrow holds the funds until payments to the government agency and insurance company are due.
- Title search and title insurance fees: a title search is a detailed review of historical records relating to the property in question. The title search may reveal liens, unpaid taxes, judgments against the seller and other property defects. Title insurance protects the buyer or lender against any such defects that may have been missed during the title search. There are two types of title insurance, one that protects the lender's interests and one that protects the buyer's interests. Typically, the lender's title insurance is a required fee while the buyer's title insurance is optional.
- Underwriting fees: a lender charges a fee for "underwriting" the loan on your home. Often this fee is one of the largest on your Good Faith Estimate and closing statement. Sometimes document preparation fees are included in underwriting fees. The underwriting process is what a lender uses to determine the risk of offering a mortgage to a specific borrower.
Lowering Closing Costs:
Some lenders offer a no-closing cost mortgage. When you get a no-closing cost loan, however, those fees still have to be paid, so may be hidden in higher interest rates or higher loan amounts than the cost of the home. VA loans require the seller to pay a portion of the closing costs, so if you qualify for a VA loan, you can reduce some of the fees you pay. A highly motivated seller may offer to pay some or all of the closing costs to get the home sold more quickly. We can help you determine if the seller is motivated and willing, so talk to us about adding that option to your sales contract.