The bundle of fees associated with the buying or selling of a home are called closing costs. Certain fees are automatically assigned to either the buyer or the seller; other costs are either negotiable as spelled out in the sales contract.
"Closing costs" can add thousands of dollars to the cost of a home, so it's essential to know what to expect. RESPA stands for Real Estate Settlement Procedures Act. It requires lenders to disclose information to potential customers throughout the mortgage process. The goal of RESPA is to protect borrowers from abuses by lending institutions. RESPA mandates that lenders fully inform borrowers about all closing costs, lender servicing and escrow account practices, and business relationships between closing service providers and other parties to the transaction.
At HFR, we negotiate the sales contract for you by getting the sales price you want and work to limit the number of closing costs for which you will be responsible.
We walk you through the closing costs, answering any questions you may have explaining which costs are decreed by law to be yours and which are negotiable.
Buyer Closing Costs
When a buyer applies for a loan, lenders are required to provide them with a "Good Faith Estimate" of their closing costs at the time the loan application is submitted to the lender. The fees vary according to several factors, including the type of loan they applied for and the terms of the purchase agreement. Likewise, some of the closing costs, especially those associated with the loan application, are actually paid in advance.
The estimate is based on the loan officer's past experience and may not include all the closing costs. We will be glad to review the "Good Faith Estimate," answering questions and highlighting missing costs and estimates we believe to be low.
For loans made after July 1999, lenders are required by federal law to automatically cancel Private Mortgage Insurance (PMI) when the loan balance falls below 78 percent of your purchase price… not when you achieve 22 percent equity, which will happen much more quickly with rising property values. (Certain "higher risk" loans are excluded.) But you have the right to cancel PMI (for loans made after July 1999) once your equity reaches 20 percent, regardless of the original purchase price.
Keep track of your principal payments. Also keep track of what other homes are selling for in your neighborhood. If your loan is under five years old, chances are you haven't paid down much principal… it's been mostly interest. But property values in many parts of the country have gone through the roof lately. And that can earn you 20 percent equity even if you have not paid down much principal.
When you think you have reached 20 percent equity in your home, you can begin the process of freeing yourself from PMI payments! You will need to notify your mortgage lender that you want to cancel PMI payments and you'll need to submit proof that you have at least 20 percent equity. A state certified appraisal on the appropriate form (URAR- 1004 uniform residential appraisal report for single family homes) is the best proof there is… and most lenders require one before they will cancel PMI.
Seller Closing Costs
If the seller has not yet paid for the house in full, the seller's most important closing cost is satisfying the remaining balance of their loan. Before the date of closing, the escrow officer will contact the seller's lender to verify the amount needed to close out the loan. Then, along with any other fees, the original loan will be paid for at the closing before the seller receives any proceeds from the sale. Other seller closing costs can include:
Broker's Commission
Transfer Taxes
Documentary stamps on the Deed
Title Insurance
Property Taxes (prorated)
Negotiating Closing Costs
In addition to the sales price, buyers and sellers frequently include closing costs in their negotiations. This can be for both major and minor fees. For example, if a buyer is particularly nervous about the condition of the plumbing, the seller may agree to pay for the house inspection.
Likewise, a buyer may want to save on up-front expenditures, and so agree to pay the seller's full asking price in return for the seller paying all the allowable closing costs. There's no right or wrong way to negotiate closing costs; just be sure all the terms are written in the purchase agreement.
Prorations
At the closing, certain costs are often prorated (or distributed) between buyer and seller. The most common prorations are for property taxes. This is because property taxes are typically paid at the end of the year for which they were assessed.
Thus, if a house is sold in June, the sellers will have lived in the house for half the year, but the bill for the taxes won't come due until the following year! To make this situation more equitable, the taxes are prorated. In this example, the sellers will credit the buyers for half the taxes at closing.
