Zack Childress Closing Costs: No Surprises

By Jane Hodges

Many homebuyers mistakenly arrive at closing unprepared for a laundry list of closing costs: major and minor fees that are a routine part of any home purchase. This can be because the lender increased fees on lender-controlled aspects of a transaction, or because a buyer chose a third party (appraiser, inspector, attorney, title company) that might charge higher prices than those estimated by the lender.

Fortunately, new rules and regulations provide more clarity on the closing costs that borrowers can expect to pay. As a rule of thumb, homebuyers can expect to pay closing costs equivalent to 3 percent to 5 percent of their loan amount, says Guy Cecala, publisher of Inside Mortgage Finance, a Bethesda, Md.-based mortgage research firm. This is money that the homebuyers will spend in addition to their down payment, and those stretching to buy should know that they´ll need to cover these closing costs in addition to the savings reserves that some lenders require. (In other words, raiding your savings on closing day to pay unforeseen closing costs may not work out!)

So how can you avoid surprises with closing costs? There are several steps you can take:

Ask the seller to pay the closing costs
Before you make an offer on a home, discuss with your agent whether you can negotiate with the seller to pay some or all of your closing costs. Many buyers who are stretching to finance a down payment make an offer that´s slightly higher and ask that, in exchange, the seller pay some or all of the closing costs. (Essentially, this amounts to financing closing costs within the mortgage loan.) Sellers eager to complete a transaction may offer to pay some closing costs in order to expedite a deal, or price their home slightly high on the assumption that they´ll be helping a buyer with closing. If a seller commits to pay some or all of the closing costs, Cecala recommends getting it in writing and appending the seller´s commitment to HUD loan documents so that the seller is held to their promise.

Understand the Good Faith Estimate
Make sure you get – and carefully review – the Good Faith Estimate that your lender must provide within three days of your loan application. This paperwork will describe to you the closing costs associated with your loan, ranging from lender-related fees (such as loan origination fees) to outsiders´ fees required to complete your transaction (inspection, appraisal, etc.). A good faith estimate is just that – an “estimate” – and some closing costs cited in that estimate can change. But as of January 2010, the government made it illegal for some of those costs to rise and capped other cost increases at no higher than 10 percent.

Closing costs that cannot increase include points (once an interest rate is locked), loan origination fees and transfer taxes. The costs that can increase, but by no more than 10 percent, include any services required by a lender, title-related services, and government recording charges. Other closing costs that can change include services that the buyer selects, such as extra home inspections, title services not required by the lender, homeowner´s insurance, and escrow deposits.

Get more than one Good Faith Estimate
Because lenders all use the same form to provide customers with the closing cost numbers, it´s possible to compare the estimates of various lenders, and to negotiate with them on some fees.

Read your HUD-1 Settlement Statement closely
Ask that your lender to provide the HUD-1 Settlement Statement well before closing, so you can comparing the closing costs listed in the statement with your Good Faith Estimate. You should feel free to ask your lender about any discrepancies or price adjustments you notice, so that you´re prepared and well-equipped to close with confidence.

“You do have recourse after the loan closes if you find out you´ve been overcharged,” says Cecala.

DOCUMENTS AND FEES YOU SHOULD EXPECT AT CLOSING

• Bank note: If you´re closing on a house or condo it´s called a mortgage. If it´s for a co-op it´s called a security agreement. The security agreement or mortgage “puts teeth into the note.” A note is a piece of paper that says I borrowed the money and I will promise to pay it back. The security agreement or mortgage says what the bank will do if you don´t pay it back.
• Transfer documents: For a co-op, those are co-op documents, which are a proprietary lease. For a condo, the unit condo power of attorney gives the condominium limited power of attorney to conduct the business of the condo. A house does not have a transfer document
• Hud-1: Discloses fees and costs
• Aztech: For a co-op, it´s a recognition agreement. The bank has a security interest in the shares but the coop also has a security interest in the shares. The recognition agreement is signed by the bank, co-op, and the borrower/buyer, recognizing each others´ mutual security interest in the shares.
• Lead paint disclosure: The seller, buyer and usually the agent all sign. Most people waive their right to do a lead paint inspection.

Fees

• Attorney´s fees: Fees attendant to the loan, including the bank attorney´s fees.
• Transfer agent fee: If the co-op has a transfer agent, the transfer agent gets a fee to review the recognition agreement; condos also sometimes have have transfer fees.
• Co-op charges: Charges can include a move-in fee and a transfer fee; co-ops come up with all kinds of fees.
• New York State Mansion Tax or mortgage tax: If you´re buying a home in New York State, and the sale price is over a million on any residential house, you will pay a mansion tax. If the sale price is under a million, you´ll pay a mortgage tax.
• Title charges: (for a condo or house) pays for the title report ordered by the lawyer. It´s a onetime insurance premium you´re paying for the title. It´s a research of the property to find any and all encumbrances. The seller has to secure all the claims against a property to close. The title company is ensuring that the buyer has a good, clean, marketable title to that home or condo.

Related articles

• How to lower your closing costs (sfgate.com)
• The myth of the no-fee mortgage (findwell.com)
• Four reasons not to refinance your home (theglobeandmail.com)

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