What are the actual costs in closing costs?

If you have even started thinking about buying a home, there is a good chance you’ve heard the term “closing costs,” but I know that many people have questions about what they are and how they are calculated.

I talked about closings and closing costs in previous posts, but here I’ll talk about what actually makes up the closing costs.

The “closing” on a house is a meeting between the buyer, seller, and lender when the house and money legally change hands.  At your closing, both the buyer and seller may pay closing costs. The Real Estate Settlement Procedures Act (RESPA) of 2010 changed how closing costs are shown.  Therefore, even if you have bought a house and been through a closing before, it’s probably a little different now.  RESPA was passed so that people buying houses could more easily compare “apples to apples” when it came to mortgage brokers by requiring different language and the same definition of terms. 

Below is an explanation of all of the different types of fees and costs that make up your final closing costs and where that money goes.

·         Loan Origination Charge – In short, this is the money to cover everything that the lender does to make sure you close on time and get your mortgage.  This fee is where most of the RESPA changes were made.  Before RESPA, many items listed in this section were shown separately, but today they are clumped under “loan origination fee.”

• Loan origination fee– The origination fee is sometimes shown as a percent (%) of your loan.  It is a tax-deductible cost.  It is the amount of money that you are paying the lender to do all of the work involved in deciding, making, and then supporting a loan.  
• Application fee – This is a fee that you pay to have the lender consider loaning money to you. 
• Processing fees – The processing fees are charged by the lender as a way to cover some of the costs of the work that goes into making a loan.  Lenders may have to make long-distance phone calls to verify your employment and speak with you, create files using office supplies, and maintain these.
• Underwriting fee – Like insurance, mortgages have underwriters.  This fee covers the costs associated with underwriting the loan.
• Funding fee – Typical on VA loans, the funding fee covers administrative costs similar to the processing fee. 

·       
 Title Services Fee – Like the “Loan Origination Charges”, RESPA affected the way these fees are listed as well.  The Title Services Fee is a new way to bundle the following group of fees:  

•      Document preparation fees– When you close on your house you’ll see that you sign a lot of pages of paper!  Three sets of copies are made of these papers, along with other sheets of office notes that you do not have to sign.  The document processing fees cover the costs associated with copying and mailing all paperwork.
•     Title/Abstract search – The title search helps make sure there are no problems with the title (see my previous blog post about titles.
•     Title examination/Title insurance binder– This is insurance that will protect the lender (and owner, if an owner policy is purchased) if anyone brings a lawsuit against the title on the house. 
•      Settlement fee – This covers the cost of the services by the closing agent for the closing.
•      Lender’s and buyer’s attorney – A lawyer typically works behind the scenes on many house closings and mortgages to make sure that everything is following current real estate law.

·         Survey fee – This money pays for someone to come and make sure the land or property you are buying has not been built on or taken over by the neighbors accidentally or on purpose.  This makes sure you know exactly what is yours and what belongs to your neighbor. 

·         Legal and recording fees or transfer fees – This money is sent to the country clerk and state to change the name of the owner (and person who owes money for the taxes) and record the sale price of the home in the official record. 

·         Property taxes– Property taxes are pre-paid by the seller.  When you buy the house, part of the closing cost is a “tax adjustment”.  This basically means that you are paying the seller back the amount of taxes that he or she has pre-paid.      

·         Per Diem interest – At closing, you will need to pay the interest on your loan from the closing date to the date the first payment is due.

·         Flood certification – Before you buy a home, the lender will make sure the home you are buying is not in a flood zone. The flood certification charges cover the costs to have an expert review where the property is located.

All about titles

As a specialist in mortgage lending I often get asked by friends and family, “Do I really need to get a title search?”  While my answer varies based on the type of property being purchased, I’ve found that most people struggle with the legal language surrounding the title search and title insurance process.  I thought I’d try to explain some of these items in layperson terms in my post this week.  


What is a real estate title?

A title is like a deed on a car. The title for your house is simply the document that shows what the property and everything on it are and what you can and can’t do with it.  An important thing to know about titles is that the title holder is often the owner (but not always!).  

What is a title search?
A title search is a process that is performed primarily to determine the answer to three questions:

1.      Does the seller really own the house and is he or she able to sell it legally?

2.      What can the owner or other people (like neighbors) legally do with the land: can they have businesses? Build fences? Walk on it with their dog? Leave a snowmobile in the front yard? 

3.      Is any money owed on the property for past taxes, mortgages, or is the property part of a deal between a previous owner and someone else? 

A title search may uncover a number of possible problems such as:

Real covenants – a legal promise to do or not to do something with the land.  Examples are having a business on it or building a fence, etc. If a covenant is broken then the person who breaks it may owe the person they promised money.

 

Easements – meaning someone other than the owner of a piece of property is allowed to use it. 

Servitudes – this is when there are rules made by a homeowners’ association, subdivision developer, or community about what you can and can’t do with the land.

Liens – the property is acting as protection against someone not paying a loan.

What can I do if I’m nervous about a title?

Purchase title insurance.  Title insurance will protect and pay back the owner if anyone brings a lawsuit against the title on their house (if someone is owed money or use of your property by another owner and it is tied to your land or house). 

Flood insurance

In 1968, Congress created the National Flood Insurance Program (NFIP) in response to increased costs of tax payer funds for flood victims and increasing amount of damage by floods.  An administration under the Federal Emergency Management Agency (FEMA) manages the NFIP.

If you are looking to buy, build, or improve any dwelling / structure that is located in a flood zone (also known as Special Flood Hazard Areas) you will be required to purchase the appropriate flood insurance.

From a lender’s stand point your coverage will have to meet one of the following:

·       Coverage to the  maximum coverage amount ($250,000)

·       Coverage to the loan amount

·       Coverage to the value of the structure in the flood zone

A lender obtains flood certificates for every mortgage request.  The certificate is derived from mapping completed through FEMA of the property in question, and provides the answer of if the property is located in a flood zone or not.

Home inspections, surveys & tests

When you are purchasing a home, there are a variety of tests and assessments that you can conduct on the property to protect yourself from “surprises” later on.  The most common of which is a home inspection.  Most buyers choose to get a home inspection before purchasing a house or condominium, and in some cases, financing is contingent on the inspector’s report.  Home inspections include different items depending on the property or the state in which you are purchasing your home, but it will generally involve a review of the home’s structural elements, roof and attic, plumbing, systems and components, electrical, appliances, garage (if applicable), and some exterior elements such as the exterior paint, driveway, fences, and drainage.

I have many borrowers ask me about home inspections and why they are necessary, especially if the person is purchasing a condominium or a newly constructed home. Even in these cases, it is important to make sure that you have all the information you can before purchasing your home.  Your real estate agent can help you find an inspector who is best suited for the property you are considering, but your best bet will always be to find an inspector who has certification by the National Association of Certified Home Inspectors (NACHI).

In addition to inspections, there are other tests that you may want to have completed.  A survey is an important one.  A survey uses measurements and town records to map exactly where your yard or land begins and ends.  Especially in the rural parts of the state, there can be confusion about where a property line begins and ends, so it is often a good idea to have this done, and again, some financing programs will require it.

Your real estate agent will be able to help you decide what other types of tests you need for your home.  Examples include radon (which is advisable if the home is built in an area where there is lot of ledge), water (advisable if you have a well), lead (in an older home), septic system, mold, or asbestos (again, in an older home). 

Again, your real estate agent will be able to help you decide whether you need certain tests completed and/or whether you should make the purchase of the home contingent on the results, but below are a few links that my help you.

Home Buyers’ and Sellers’ Guide to Radon

Maine Drinking Water Program 

Well Types

Your Septic System

Get Rid of Mold 

Lead hazard prevention

Home Buying: Get Educated

Doing your own research before attempting to step into the home buying process is a great idea - you don’t buy a car before learning how to drive, right?  To make your dream come true, there are many steps within the home buying process and many different professionals that you will interact with along the way.

A great start to becoming educated is to attend a home buying course.  This will give you an overall scope of what to look for - and what to look out for - during your home buying adventure.  In a home buying course, you will learn more about:

• Budgeting for a down payment
• Understanding Credit reports
• Shopping for the right loan
• Shopping for a home
• Mortgage process from A – Z

Another important feature of these courses is to help you understand who will be involved in your home buying experience, which includes:

• Realtors
• Loan Officers
• Appraisers
• Building Inspectors
• Title Companies

Some courses will cost money (roughly $30-$50) but usually come with a Certificate.  This Certificate is good for 2 years and might be associated with closing cost assistance if you are qualified through Maine State Housing Authority.

 For more information and to find course schedules, visit the Homeworks website.  This particular site is affiliated with Maine State Housing, and offers course certificates that are valid for two years.  If you complete this course and finance through Maine State Housing Authority, you will also qualify for the Gift of Green (while supplies last).  The Gift of Green is a grant (that doesn’t need to be repaid) of $2,500 to be used towards closing costs.

Earnest money- when to use it & how not to lose it

by Denis Knox

Last week I mentioned “earnest money” as one of the expenses that you should plan on when saving money to buy a house.   Here is a little more information on earnest money. 

When you make an offer on a home you are asked to give about 1% - 2% of the offer in cash right away.  This cash is called earnest money and shows that you really are serious about buying the house.  Before signing a contract for the house, make sure the contract includes wording that will let you get your earnest money back if something happens and the sale falls through. Remember: 

• Always read the contract your real estate agent gives you very carefully 
• You can often a change a contract before it is signed- but not after 
• Do not sign anything you are not comfortable with.  If you have questions, ask your real estate agent before you sign.

Understanding down payments

by Denis Knox

Typically, the first step to home buying is to start saving for a down payment. A down payment on a home is the amount of cash that you will be able to put toward the house before taking any loans (i.e., a mortgage).  

Online financial calculators sometimes ask for the down payment/ prepayment as a percentage.  To find out the percentage of your down payment remember the simple percentage rule: multiply your down payment in dollars by 100 (or just add two 0’s) and then divide by the total cost of the house.  This will give you your down payment percentage (%).  

The larger your down payment is, the less money you will need to borrow to buy the house. (But when figuring out how much cash you should save to purchase a home be sure to save extra on top of the down payment for costs such as earnest money, an inspection, and closing fees!)  

There are mortgages programs for people with little or no money for a down payment.  For example, in Maine CU Promise Loans and other mortgages offer a number of options for home buyers.