Depending on where you live in the United States, you may hear different references to closing a mortgage. Closing, settlement and transfer, closing escrow or passing papers; they all basically mean the same thing. The main thing that happens at a closing is that the buyer receives the marketable title, the seller receives the purchase price, and other items are adjusted between the purchaser and the seller.
Closings can be done face-to-face with the parties meeting in person or they may be done in escrow, not meeting face-to-face. In a face-to-face closing, two things happen: 1) promises are fulfilled in the real estate sales contract 2) the purchaser’s loan is finalized and the mortgage (loan) lender disburses the loan funds. Face-to-face closings may be held in one of many places, including a county office such as a Registry of Deeds, an attorney’s office, a lending institution, an office of a title company, or an escrow company.
The individuals who may attend a closing are the buyer, seller, real estate salespersons or real estate brokers, the seller’s and buyer’s attorneys, lending institution representatives and representatives of the title insurance company. Normally one of these individuals is responsible for conducting the face-to-face closing and moderates the monies passing from one party to another.
Many documents are needed for closing including important disclosures.
The responsibilities for preparing these documents are normally divided up among the parties and individuals who attend the closing. There are some specific required disclosures to be provided at the time of the loan application and the closing:
HUD special information booklet
– Lenders must provide this to any borrower who has submitted an application for a first mortgage loan. The borrower should receive this document from the lender within three days after an application is received by the lender.
Good faith estimate of closing costs
– Within three days after the lender receives an application, the lender must provide the borrower with a good-faith estimate of closing costs the borrower is very likely to incur at the mortgage closing. The good-faith estimate can be a range or a specific estimated amount. The buyer is also required to tell the borrower if the borrower uses a specific attorney or title company at closings and must provide the borrower with the estimated the costs associated with this attorney/company’s services.
HUD-1 Form (Uniform Settlement Act)
– The Real Estate Settlement Procedures Act (RESPA) requires that the borrower and the seller be provided with an itemized list of all costs to be paid by either of them at the closing. This itemized list is presented in a HUD-1 Form and must be presented to both the buyer and the seller at or before the closing. The buyer (borrower) has the right to review the HUD-1 form one business day prior to the closing. The seller does not have this right.
You know how the price tag on a pair of shoes at the store isn’t really the amount you end up paying at the register?
There is almost always sales tax that gets added on to give you the final amount you have to pay for those shoes. Well, buying a home works somewhat the same way except when you take out a mortgage to buy a home there is a lot more that has to be added on than just the sales tax. This ‘a lot more’ is more commonly referred to as ‘closing costs’. ‘Closing costs’ is the general name given to the list of fees that you have to pay when you take possession of the home, in addition to the price of the home itself.
So how do you find out how much these closing costs are going to, well, cost?
This is one of the reasons why it is so important to get your mortgage through a lender you can trust. When you apply for a mortgage, it is the lender or the mortgage broker who normally prepares a ‘Good Faith Estimate’ of the closing costs. This estimate of closing costs is required to be sent to you within 3 days of your application. But remember, as the buyer, you may not pay all of the closing costs to the lender. You may end up paying them to other parties involved in the transaction, such as, an attorney or appraiser. Remember, all of the costs due by any and all parties at the closing will be laid out on the HUD-1 form. It’s always a really good idea, even when you know you have a lender you can trust, to plan for actual closing costs to be a bit higher than the ‘Good Faith Estimate’ you receive because it may appear a bit different on the HUD-1 Form. And if closing costs are less than the estimate then, hey, dinner is on you!
Another tip is to not only look at the ‘total cost’ when you’re comparing two lenders.
The ‘total cost’ that a lender gives you includes this estimate of closing costs, what other people are going to charge you. So one lender’s deal might look better only because they have a lower estimate of closing costs. When comparing lenders, also compare what you would pay excluding closing costs.
As for what goes into this ‘closing cost’ amount, that can depend on what arrangements are made in the terms of the sale, where you live and a whole host of other things. However, some of the typical closing costs involved in a ‘First Mortgage’, or typical mortgage, may include: points, title insurance, property taxes, prepaid loan interest, prepaid insurance property inspection fees and attorney fees. For a ‘Second Mortgage’ (also known as a ‘Home Equity Loan’), closing costs can include: title insurance, appraisal fees, filing fees and homeowners insurance.
Some of these fees may seem a little mysterious so it’s worth finding out a little more.
Points – Points are like a percentage of the mortgage amount that you pay to the lender in order to get special provisions put into your mortgage. For instance, you may pay for 2 points. Normally for every point you pay, you will decrease the interest rate you will pay by 0.25%. So if you paid for 2 points, your interest rate will be decreased by 0.50%. Points normally cost 1% of the amount of the loan (mortgage) amount. So if you wanted to lower your interest rate by 0.50% on a $100,000 mortgage, you would pay $2000.00 for the points.
Title Insurance
Title insurance insures a property owner (seller) or lender against loss, which may be results of defects in the title. Policies often exclude coverage against certain defects such as liens.
Prepaid Property Taxes and Prepaid Insurance
Property taxes are what state and local governments may charge property owners to maintain the streets, sewage systems and everything else so you don’t have to pay a toll every time you cross the street or flush the toilet. Most mortgage lenders require that borrowers deposit at least the amount of the unpaid property taxes from the date of the mortgage until the end of the month into an escrow account. As for insurance, generally, the first year’s premium is paid in full at the closing. Normally, monthly insurance premiums are paid after the closing as part of the monthly payment.
Prepaid Loan Interest
Lenders often require the borrower to prepay a certain amount of loan interest. This can often be between 3 and 12 months of the interest a borrower will pay on the loan.
Property Inspection Fees
These fees are paid to professional home inspectors to make sure there is not some hidden flaw in the property being purchased. Flaws to the property should be noted. If a flaw is found after the closing and wasn’t noted by the inspector, your agent or even the seller, you may be entitled to money to pay for damages.
Attorney Fees
If any of the attorneys used by the parties are, by contract, to be paid at the closing, you can expect to fork over that money too at closing. Remember the lender’s attorney may also charge you a fee.
