The mortgage closing or settlement (escrow closing) probably causes more questions from the borrower than any other—we will answer some of the most frequently asked questions.
A settlement may involve several people, and a variety of documents and fees. Once you understand what is involved, you may Find the entire closing process simpler than you might have imagined. While this section focuses on settlements in home purchases, much of the information also will be useful if you are refinancing a mortgage.
We’ll start with two important facts
- Many buyers think of settlement as the last step to becoming the legal owners of their new home. But it’s a process that begins weeks or even months before, and follows an outline set largely by a buyer’s original offer to the seller of the house. That offer becomes the sales contract, once it’s signed by the seller, and it covers many of the key elements of the settlement or closing.
- Practices differ from one locality to another regarding who pays what closing costs. Across the country, however, buyers and sellers are free to negotiate certain fees. In some cases, certain costs can be shifted, it may affect the sale price of the property. In most states, costs can also be cut by shopping around among providers of the settlement services.
The point is this: The more you know about the process, the better your chances are for saving money at settlement time.
Types of Closing Costs
There are three basic categories of charges and fees in settlement or closing transactions:
- Charges for establishing and transferring ownership
These include title search, title insurance, related legal fees, notary charges, hazard insurance, and fees for conducting the settlement.
- Amounts paid to state and local governments
Recordation fees, and prepaid property taxes.
- Costs of obtaining a mortgage
These include appraisals, credit checks, loan documentation fees, loan origination, commitment, and processing fees.
In addition to a formal title search, your lender is likely to require a title insurance policy. The policy guards the lender against an error by whomever searched the title. (In some cases, the title insurer might arrange for or conduct the title search.) Let’s say, for example, that a long-lost relative of the seller turns up with indisputable evidence that the relative – and not the seller – holds legal title to the property. Though it should have been found in the public records, the relative’s claim was missed somehow. Errors are rare, but they do occur.
When this happens, the lending institution finds that it has loaned the home buyer thousands of dollars to buy a house from someone who did not own it. To avoid such problems, the lender will insist on title insurance prior to settlement. The cost of the policy (a one-time premium) is usually based on the loan amount, and is often paid by the purchaser. There’s nothing, however, to keep you from asking the seller, during your negotiations, to pay part of all of the premium.
The title insurance required by the lender protects only the lender. To protect yourself against unforeseen title problems, you may also want to take out an owner’s title insurance policy. Normally the additional premium cost is only a fraction of the lender’s policy, but this can vary from area to area.
Some final advice on keeping title insurance costs low — if the house you are buying was owned by the seller for only a few years, check with a title company. If you can obtain a re-issue rate, the premium is likely to be significantly lower than their regular charge for a new policy. If no claims have been made against the title since the previous title search was done, the seller’s insurer may consider the property to be a lower insurance risk.
Finally, shop around. Not just for the premium (which can vary depending on how much competition there is in a market area), but for coverage as well. (links to local title companies here.) Generally, you should look for a policy with as few exclusions from coverage as possible. The exclusions are listed in each policy. Some policies have so many exclusions – that is, situations under which the insurer will not pay for your title problems- that you end up with little coverage for your premium dollar.
Government Imposed Costs
In some parts of the country, the transfer, recordation, and property taxes collected by local and state governments may be among the heftiest charges paid at settlement. While there is no way to avoid paying these taxes, you may be able to lessen your share of the bill. Try shifting some or all of the cost to the house. But remember, you must do this when you make your offer to purchase the property.
Mortgage-Related Closing Costs
- Application fee
Imposed by some lenders, this charge covers the initial costs of processing your loan request. WE DO NOT impose up front charges.
- Appraisal fee
This fee pays for an independent appraisal of the home you want to purchase. The lender requires this opinion or estimate of the market value of the house for the loan.
At a minimum, the lender will require an independent verification from a surveying firm that your lot has not been encroached upon by any structures since the last survey conducted on the property. Alternatively, the lender may insist upon a complete (and more costly) survey to ensure that the house and other structures legally are where you and the seller say they are.
Loan Origination Fees and Discount Points
One point equals one percent of the loan amount. For example, one point on a $150,000 loan would be $1,500. In some cases – especially with refinances – the points can be financed by adding them to the loan amount.