Crash Course in Closing Costs

Chances are you have heard the term “closing costs” even if you’ve never purchased a home before, but if you have paid them in the past, did you really understand what they are and how to know if you’re getting a good deal? Thanks to laws passed over the last decade or so, mortgage lenders are required to provide you with a Good Faith Estimate (GFE) detailing all of the potential costs of a mortgage, so it’s easier than ever to compare estimates from multiple lenders. But let’s start with understanding what they are in the first place: closing costs are everything you need to pay, above and beyond your down payment, in order to purchase a home.

• Loan Charges: Lenders charge certain fees to process your loan. These services often include pulling your credit report, getting a flood certification for the property, processing your application, underwriting the loan, paying the appraiser (sometimes you pay for the appraisal when it’s ordered rather than at closing), and recording the mortgage. Other loan charges that are more common now are “points,” essentially pre-paid interest to lower the interest rate for the overall term of the mortgage.

• Impounds: These costs are directly related to setting up your escrow account — that’s the portion of your mortgage payment that goes toward taxes and insurance. I usually see my clients pay at closing three months of their annual homeowner’s insurance, one to six months of property taxes depending on the time of year the closing takes place, and about three months of mortgage insurance if applicable. These amounts may be adjusted if the total impound amount is above the lender’s threshold, noted as an “aggregate adjustment” on the GFE, closing disclosure (CD) and/or settlement statement.

• Title & Settlement Charges: In Ohio and Kentucky, most real estate closings are handled via third party companies called title agencies. They charge fees to both buyers and sellers for guaranteeing the property is transferred with a clean title and that the monies are disbursed appropriately. Buyers usually pay for a portion of the settlement fee, closing protection coverage for the lender, a lender’s policy of title insurance or a title commitment, sometimes an attorney fee, certain endorsements that your lender requests, and an owner’s policy of title insurance if you choose to purchase one. Also, if you can’t be present for the closing, the title company may send you a mobile notary and there will usually be a fee for that service.

• Commission: Depending on your buyer agency agreement and the terms of your purchase contract, you might pay commission to the broker who represented you. Some brokers also charge administration fees that are separate from commission, and if you purchase homes from certain corporate sellers you might have to pay a “buyer premium” or “technology fee”. You should always verify that the amount of commission paid, whether by you or by the seller, matches the buyer agency agreement you have signed: if it’s higher, that is prohibited by law, and if it’s lower, you might be responsible for paying the balance outside of closing.

• Government Recording and Transfer Charges: In Ohio and Kentucky, the buyer is traditionally responsible for the cost of recording the mortgage and the new deed with the county in which the property is located. This fee varies by county but is usually dependent on the number of pages recorded. Some lenders have a standard mortgage on file in some counties to minimize the number of pages that need to be recorded for individual transactions.

• Homeowner’s Insurance Premium: If you didn’t already pay your first year of homeowner’s insurance when you ordered the policy, this will be included in your closing costs.

Depending on the lender, local and state regulations and customs, and your specific situation, your closing costs can vary quite a bit which is why it’s so important to ask about them when you are evaluating which lender to use. You can offset these costs in a few ways: gift funds from a family member or friend, local grants, or contributions from the seller. Knowing your financial needs and limitations up front will help you and your real estate agent negotiate the best terms possible, and help you avoid an unpleasant surprise when it comes time to close the deal.

What Is TRID, And Why Should I Care?

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Have you bought or sold a home in the last forty years? Aside from interest rates and loan products, not much has changed in the home-buying process during that time. But some important changes are on their way, thanks to the Consumer Financial Protection Bureau (CFPB). They're called the Truth in Lending Act (TILA) - Real Estate Settlement Procedures Act (RESPA) Integrated Disclosure, or TRID for short...because there weren't enough acronyms already.

To download a handy booklet that covers everything a consumer would need to know about TRID, head over to the CFPB website and look for the "Your Home Loan Toolkit" PDF brochure. I'll go over the highlights for you:

• Today, many real estate contracts request a closing date 30 days out. When TRID goes into effect on October 3rd, lenders and title companies are recommending that you allow an extra week or two on the contract to ensure compliance with new government mandated waiting periods that are designed to allow consumers adequate time to review loan information prior to closing.
• As a buyer, you'll probably be asked by your lender to sign documents electronically since that will be the most practical way to comply with the new laws.
• The preapproval process remains unchanged, for the most part. Although lenders are now prohibited from requiring income information to provide a Loan Estimate (LE), a smart buyer should know that the most solid loan preapproval will be based on that income information. So make sure you're being open with your loan officer!
• Sometimes under the current laws, the loan is processed well before the closing date, and you get to close early! That's going to be pretty unlikely under the new rules, because the closing date determines some of the information on the Closing Disclosure (CD) and the lender needs to provide the CD to the borrower no later than 3 days prior to closing (including Saturdays for some lenders, excluding Sundays and federal holidays for all lenders).

While there is a lot more to say about TRID, very little of it will be seen by the average consumer. My advice is to make sure you're ready to act quickly once you've chosen a home: provide all the details to your loan officer, get an estimate on homeowner's insurance, and make sure your Realtor is communicating with the lender and the title company on a regular basis.

What's Inside: Contract to Purchase

You've found the right home! Time to get with your agent and write up an offer. While differences in language will be found depending on your location, the basic parts of a real estate purchase contract are pretty similar across the board. Here's a run-down of the most important points to discuss.*

1. Purchase price: Seems like a no-brainer, right? Make sure that your offer is not so low that it offends the seller, but not so high that you have no room to negotiate. Talk to your agent about the current market conditions (More buyers than sellers? You may need to be aggressive.) and this particular property to arrive at a number that works for you.
2. Earnest money: While not required by law, in Ohio and many other areas it is customary for a buyer to offer earnest money as a show of good faith. This money is deposited in a special trust account by one of the brokers involved once the contract is final, and is held there until closing. Talk to your agent about what makes sense for the property you are interested in.
3. Financing: Making an offer contingent upon your ability to secure financing for the property is widely accepted. That means that if you can't find a bank to give you a mortgage, you won't be obligated to complete the sale. This is why it's a great idea to get pre-approved by at least one lender before making an offer.
4. Seller contribution: If you know that you're going to have high closing costs, or if you only have enough for the down payment without the other fees associated with buying a home, you may want to ask the seller to pay for a portion of your closing costs. Again, talk to your agent about this -- if it's a seller's market, it may be in your best interest to forget about this request.
5. Inspections: Unless you're an experienced home inspector, you should get a home inspection for any home you make an offer on. The contract will allow you to specify how long you have to schedule inspections, and how long you'll have to negotiate any repairs or credits with the seller. Your agent should know how busy local inspectors are to make sure you have enough time to get this done and carefully consider your options.
6. Inclusions & exclusions: Know what you're buying! Just because you saw appliances and window treatments at your showing doesn't mean that the seller plans to leave them for you. Make sure your agent has stated in the contract exactly which items you would like to be included in the sale.
7. Closing: The date of closing, when the property officially transfers ownership, is going to depend on clear title and loan approval. Your loan officer and your agent should be able to advise you whether the closing date should be 30 days away or longer; if you need additional time to sell a home or for school to let out, make sure you specify that in the contract.
8. Occupancy: It used to be customary in Ohio to allow the seller 30 days after closing to move their belongings out of the home, but today we're seeing more and more buyers requesting occupancy at closing due to liability concerns. Talk to your agent about what's customary in your area to determine what works best for you.

This definitely doesn't cover everything in the contract, but hopefully provides a nice summary of the big things to consider when making an offer. As with any legal document, you have the right to go over it with an attorney to ensure your rights are protected.

* I'm not an attorney, and this article is not legal advice. It merely describes what one might read in a real estate purchase contract.