THE CLOSING
Closing, sometimes referred to as settlement, is a formal meeting attended by you, the seller, the listing and selling real estate agents, and representatives of the lender and title company. The closing can be conducted by either the lender, the title company, the escrow company, or attorneys for the buyer or seller. (As the buyer, it is a good idea to have your lawyer present, whether they are conducting the closing or not, to review all documents and protect your interests.) Make sure you know when the closing is and how much money you need to bring with you and in what form (often a certified check is required). At the closing, you will be asked to sign numerous documents, you will pay the closing costs assigned to you, and you will be given the keys to your new home. On this day, you become the official owner of your home.
The following pages include a sample U.S. Department of Housing and Urban Development (HUD-1) Settlement Statement followed by explanation of specific line items. The sample statement estimates several of the closing costs based on the purchase of a $50,000 home with a $5,000 down payment. This document will more than likely be the one used to designate your closing costs.
LETTER L. OF THE DOCUMENT DESIGNATES SETTLEMENT (OR CLOSING) CHARGES
700. TOTAL SALES/BROKER'S COMMISSION: This is the total dollar amount of the real estate agent's commission. This is usually paid by the seller, and is typically a percentage of the selling price of the home. If you have contracted with a buyer's agent and did not pay up front, this fee will be included here and charged to you.
800. ITEMS PAYABLE IN CONNECTION WITH LOAN
801. Loan Origination Fee: A percentage of the loan paid by you that covers the lender's administrative costs in processing the loan. Usually the fee is equal to one percent of the loan amount.
802. Loan Discount: Also referred to as point/points. Each point is equal to one percent of the loan amount. It is paid at the time of closing to lower the interest rate of the loan.
803. Appraisal Fee: Pays for the cost of the appraisal report.
804. Credit Report Fee: Covers the cost of a credit report, used by the lender to decide whether or not to approve your loan.
805. Lender's Inspection Fee: Refers to any charge incurred for the lender's inspection of the home. It does not refer to pest or other inspections made by you.
806. Mortgage Insurance Application Fee: A processing fee for making the loan.
807. Assumption Fee: This fee only applies if you are taking over the seller's already existing loan. The lender charges a fee for switching the loan from the seller to you.
808. Mortgage Broker Fee: If you used a broker to help you to get a mortgage loan, the fee is designated here.
809. Tax Escrow Service Fee: The fee charged by the lender or escrow company to hold your taxes in an escrow account and pay them when they are due is designated here.
900. ITEMS REQUIRED BY THE LENDER TO BE PAID IN ADVANCE:
901. Interest: Lenders usually require you to pay at closing the interest that accumulates from the date of the closing until the date the first monthly payment is due.
902. Mortgage Insurance Premium: Sometimes, you will have to pay the premium for the first year, or for the life of the loan, in advance, at closing. If this is not the case, payment is added into the monthly payment amount.
903. Hazard Insurance Premium: Also referred to as homeowner's insurance, hazard insurance protects you and the lender against loss due to fire, windstorm, and natural hazards. Lenders often require you to bring to the closing a paid first year's policy or to pay for the first year's premium at closing.
904. Flood Insurance: If your home is located in a flood hazard area, not only is this type of insurance advisable, but it is usually required by the lender. The first year's premium is paid at the time of closing.
1000-
1008. RESERVES DEPOSITED WITH LENDER: These lines identify the payment of property taxes and insurance that must be made at settlement to set up an escrow account. This money is held in the escrow account until the payment is due, at which time the lender makes the necessary payments. Because taxes and insurance payments might be due before a 12 month period has allowed the full amount to accumulate, the payments necessary to cover the full cost at the time the payment is due must be paid at closing.
1100. TITLE CHARGES: Covers the variety of services performed by the closing agent and title company.
1101. Settlement of Closing Fee: The fee paid to the closing agent, regardless of whether this is the title company or not, is included in this section.
1102-
1104. Abstract or Title Search, Title Examination, Title Insurance Binder: These charges cover the costs of the title search and examination.
1105. Document Preparation: A separate fee that some lenders or title companies charge to cover the cost of preparing final legal documents.
1106. Notary Fees: This fee pays the cost of having a person who is licensed as a notary public to witness and sign all documents. Estimated Cost: $15.
1107. Attorney's Fees: You may have to pay for legal services provided to the lender. The cost of your attorney, and the seller's attorney may also appear here, if applicable.
1108-
1110. Title Insurance: This is the cost of both your and the lender's title insurance. Title insurance protects the owner and the lender from any claims made against the property for unpaid liens, judgments, taxes, or assessments filed prior to the closing. It is necessary for you to obtain your own policy, because the lender's policy will not cover you.
1200. GOVERNMENT RECORDING AND TRANSFER CHARGES: Fees paid by you or the seller depending upon your sales agreement.
1201. Recording Fees: Usually paid by you, these are fees to pay for recording the deed and mortgage.
1202. Transfer Taxes: Transfer taxes need to be paid whenever property changes hands. Fees are set by state and/or local government, and are often split equally between you and the seller.
1300. ADDITIONAL SETTLEMENT CHARGES:
1301. Survey: As a protection for themselves and for you, the lender may require that a survey of the property be done. Usually you pay the surveyor's fee, but sometimes it is paid by the seller. A lender may not require a new survey, if a recent one is available.
1302-
1305. Pest and Other Inspections: Costs for pest, radon, lead-paint, asbestos, and other inspections are most often paid by you.
1400. Total Settlement Charges: The sum of all the fees in your column and the seller's columns.
J. SUMMARY OF BORROWER'S TRANSACTION/K. SUMMARY OF SELLER'S TRANSACTION
The first page of the HUD-1 Settlement Statement indicates the final total amount of money that you and the seller will either pay or receive at the time of closing. It also includes a section for adjusting that final amount based on the costs shared by you and the seller.
Adjustments are sometimes necessary for property taxes and other expenses, such as homeowner association dues, utilities, or other fees paid on an annual basis. If the seller has lived in the house for the first six months of the year, they are still responsible to pay that portion of taxes and other expenses, even though they may not yet be due. On the other hand, if the seller paid an annual fee up front, you will need to reimburse the seller for time they have already paid.
There will be many documents to sign at closing. It is helpful to know what some of these will be and what they will include. It is still important, however, to have your attorney review each document, and explain what it entails if you are unsure.
HUD-1
Settlement Statement: described in previous section.
Deed:
transfers title from seller to buyer. This is the most important document at
the closing. It includes:
- the name(s) of the seller(s)
- the name(s) of buyer(s)
- the manner in which you want to take the title
- legal description of the property, including the complete address
- a statement transferring the rights and claims to the property
from the seller to you
Mortgage
and Mortgage Note: legal documents pledging the property as security that
the loan will be repaid. The mortgage includes:
-
legal description and address of the property
- name(s) of borrower(s)
- name of the lender
- terms and conditions of the loan
- amount of payments
- how, when and to whom payments will be made
- information on possible penalties and foreclosure
Assumption
Statement: present only when an existing loan is being taken over. The
document states that the lender approves you as the new borrower, and gives
the current status of the loan.
Releases:
a document that shows any existing liens on the home have been satisfied
either before or at the time of closing.
Bill
of Sale: this document transfers ownership of any personal property included
in the sale of the home, such as appliances and fixtures, from the seller to
you.
Lien
Waiver: states that neither you nor the seller have contracted for services
or ordered any items that would cause a lien to be placed against the
property. This includes any home improvements such as new carpeting or
roofing.
Real
Estate Tax Agreement: shows how the property taxes are adjusted and what the
responsibilities of you and the seller will be in paying the taxes.
Truth-in-Lending
Disclosure Statement: lenders are required to provide this statement to all
borrowers. It includes the following information:
- name and address of lender
- principal amount of the loan
- interest rate of the loan
- amount of mortgage insurance payment, if applicable
- number of installments to be paid
- the date the first payment is due
- prepaid finance charges paid by the seller and buyer
- other costs that are not finance charges
- total finance charges for the loan if it is held until maturity
- total of all scheduled mortgage insurance payments
- late charge amount and when it may be assessed
- annual percentage rate (APR) of the loan using certain finance charges,
and rounded up to the nearest .25%
Real
Estate Settlement Procedures Act (RESPA) form:
According to the RESPA, all borrowers must be given a form, which outlines
all transaction costs for both you and the seller. These figures should be
the same as the ones in theHUD-1 Settlement Statement. However, they may be
arranged differently.
FHA
Side Agreement Statement: This form is only necessary when using an FHA
loan. It requires you and the seller to state that you have made no
agreements, other than what is contained in the sales agreement.
** Be sure to save all documents and receipts from closing, as a portion of these costs, including taxes, interest, and points, can be used as income tax deductions. **