(1) What does the closing process entail?
Let's start at the very beginning — what does “closing,” “settlement” or “closing escrow” on your house mean?
Closing, or settlement as it’s known in some parts of the country, is a term used for the point in time at which the title to the property is transferred to the buyer and, generally, a mortgage (or “deed of trust”) is given by the buyer/borrower to the lender.
Some information about the costs associated with closing on your home should be provided to you before you put a contract on a house. If you are obtaining a loan to purchase the property, your lender has three days from the time of the loan application to provide you with a Good Faith Estimate of your loan costs so there are no surprises. Within those three days you should also receive a copy of the booklet Buying Your Home, which outlines the settlement process. If these two things do not occur, talk to your lender.
Once the seller accepts your sales contract, the countdown to closing begins. Timing is essential to make sure all the ingredients for a successful closing are in place for your arrival. In some parts of the country, the settlement agent is an attorney, title company, or escrow company. At Cypress Title, attorneys handle all home purchases.
Next, the settlement agent will request preliminary title work. A title professional will search and examine the public records for information related to your home’s title. This provides warnings of title flaws that must be dealt with before the property can change hands. For instance, the previous owner may have failed to pay local or state taxes. Or there may be an outstanding mortgage or judgment on the property. Cypress Title works hard to see that such obligations are dealt with and resolve any issues we find, well before you go to closing, if possible. If the sales contract calls for a prior mortgage to be paid off, Cypress Title will order payoff figures from the existing lender.
Upon receipt of the Lender’s Instructions to Proceed, Cypress Title will prepare the HUD-1 Settlement Statement. The HUD-1, as it is referred to, outlines all of the costs for both the buyer and seller associated with the closing. (See question 3 below explaining closing costs.)
On closing day, the property will be transferred from the seller to the buyer. In most parts of the country, you will sign a number of documents that will be explained by your settlement agent. Check with your settlement agent for more details on how the closing is conducted in your area. Once all of the signing is done, the house is yours!
(2) What is title insurance and why do I need it?
When you purchase your home, how can you be sure that there are no problems with the home’s title and that the seller really owns the property? Problems with the title can limit your use and enjoyment of the property, as well as bring financial loss. That is what a title search and title insurance are for.
The Title Search
After your sales contract has been accepted, a title professional will search the public records to look for any problems with the home’s title. This search typically involves a review of land records going back many years. More than 1/3 of all title searches reveal a title problem that title professionals fix before you go to closing. For instance, a previous owner may have had minor construction done on the property, but never fully paid the contractor. Or the previous owner may have failed to pay local or state taxes (see below for some other common title problems). Title professionals seek to resolve problems like these before you go to closing. But what happens if a problem arises after you move in?
The Owner's Title Policy
Sometimes title problems occur that could not be found in the public records or are inadvertently missed in the title search process. To help protect you in these events, it is recommended that you obtain an Owner's Policy of Title Insurance to insure you against the most unforeseen problems.
Owner's Title Insurance, called an Owner's Policy, is usually issued in the amount of the real estate purchase. It is purchased for a one-time fee at closing and lasts for as long as you or your heirs have an interest in the property. Only an Owner's Policy fully protects the buyer should a covered title problem arise with the title that was not found during the title search. Possible hidden title problems can include:
- Errors or omissions in deeds
- Mistakes in examining records
- Undisclosed heirs
An Owner's Policy provides assurance that your title company will stand behind you — monetarily and with legal defense if needed — if a covered title problem arises after you buy your home. The bottom line is that your title company will be there to help pay valid claims and cover the costs of defending an attack on your title. Receiving an Owner's Policy isn't always an automatic part of the closing process, and is paid for by different people in different parts of the country. Be sure you request an Owner's Policy and ask how it is paid for where you live. No matter who pays for the Owner's Policy, the fee is a one-time fee paid at closing. The Owner's Policy protects you for as long as you or your heirs have an interest in the property.
You also have the option of purchasing a policy with expanded coverage and it covers more things than the Owner's Policy. Ask your local title company for an explanation of the expanded Policy so you can decide which policy is the best one for you.
(3) What are “closing costs”?
We’ll break down the different categories of costs you’ll encounter when closing a real estate loan:
Real Estate Broker Commission/Fees (Section 700)
If you use a real estate agent to help you in buying your home, the cost of the agent’s services can be paid in one of two ways. Generally, the seller pays for all agents in a transaction in an amount usually stated as a percentage of the sales price. While this amount will be deducted, along with other seller-paid closing costs, from any amount the seller might otherwise be paid and is usually stated on the HUD-1, this will not be your charge. Increasingly, buyers in some places are engaging their own so-called “buyer’s broker or agent.” How they are paid and by whom varies from place to place and can be negotiated in many cases. Sellers frequently also pay for such services on behalf of buyers but if a charge is paid by the buyer, it will also be stated on the HUD-1 and added to the amount you’ll need to bring to closing.
Loan Fees – Direct Loan Costs (Section 800)
Most people need to obtain a mortgage loan to pay for their home. There are often fees associated with obtaining a loan such as the ones listed below. These fees include ones paid directly to the lender or the lender’s designated payee. Fees payable to third-party loan originators (typically mortgage brokers) are also shown in this section of the HUD-1.
- Loan Origination Fee – This fee covers the lender’s cost of obtaining financing and administration for your loan. The fee is usually calculated as a percentage of the loan amount but can also be in a flat dollar amount. It has become more common for an “application” fee (stated in flat dollar amount) and, possibly, other up-front charges like an “underwriting” fee (also usually in flat dollar terms) either to take the place of or be in addition to an origination fee. Each lender and each loan program a lender offers will have different front-end charges. You should shop carefully and examine all the fees and terms prior to closing. It is generally too late to change those fees and terms at closing.
- Loan Discount (sometimes referred to as “points”) – This is a one-time fee charged by the lender in order to give you a lower interest rate on your loan. Each point is 1% of the mortgage amount. Points paid upfront can reduce the interest rate you pay on your loan. Whether this is the best option for you in shopping for a mortgage loan depends on whether you have the necessary cash and how long you think you’ll stay in the home or keep the mortgage before selling or refinancing — the longer you intend to stay and keep the financing, the better off you may be paying something upfront and paying a lower interest rate on your loan. In any event, this cost will be collected at closing generally.
- Appraisal Fees – To approve your loan, your lender has to obtain an estimate of what your home is really worth. The appraisal fee covers the cost of getting an estimate of the market value of your home, usually by an independent, certified, licensed appraiser.
- Credit Report Fee – Mortgage lenders require a credit report to determine whether or not you are eligible (have good enough credit) for a loan, how much they will lend you and at what interest rate. Credit reports today often also include a “credit score,” which is an indicator of your ability and willingness to repay the loan. The higher your credit score, the better risk you are.
- Lender Inspection Fees – If the lender requires certain inspections to take place before closing (particularly where new construction or recent repairs are involved), such inspection fees, payable to the lender or its designee, will appear in this section of the HUD-1.
- Mortgage Insurance Application Fee – There are often fees associated with processing an application for mortgage insurance. Some private mortgage insurers waive the application fee. This line of the HUD-1 may be used for other fees when the borrower is seeking an FHA-insured or VA-guaranteed loan.
- Assumption Fee – If you are taking over the existing mortgage loan on the home, there is often a charge associated with assuming the mortgage, called the assumption fee.
- Mortgage Broker Fee – This fee covers the costs of services of a mortgage broker if one is engaged by the borrower to help them shop for mortgage financing. Mortgage brokers typically present the borrower’s application to a variety of funding sources before helping the borrower make their final selection.
Items Required by the Lender to be Paid in Advance (Section 900)
There are certain items the lender may require you to pay at the time of closing or in advance of the actual closing date. These could include:
- Interest – Lenders usually require payment of loan interest from and including the day of closing through the end of the month of closing. After that, interest is accrued and paid as part of the monthly loan installments.
- Mortgage Insurance Premium – At the settlement, you may be required to pay your first year's mortgage insurance premium, or a lump sum premium that covers the life of the loan. This fee is payable to a private mortgage insurance (PMI) company. If the loan is federally insured (FHA) or guaranteed (VA), the mortgage insurance or funding fees for those government loan programs would be charged.
- Hazard Insurance Premium – Often, lenders require payment of one year’s hazard insurance, commonly referred to as homeowner’s insurance, against fire, windstorms and natural hazards. In order to bind the coverage, the premium is often paid in advance of closing.
- Flood Insurance – Depending on the location of your home, flood insurance may be required and payment of the first year’s premium must be made in advance of closing.
Escrows/Impounds/Reserves (Section 1000)
Although the lender isn't required to provide an estimate of the reserves they will be collecting, it is important that you be aware of whether the lender will or will not be “escrowing” for taxes, mortgage insurance (if any), hazard and flood insurance. The use of an escrow/impound account to build up the funds needed to pay these items as they become due can often be a good way for borrowers to budget rather than having to pay these large sums out-of-pocket when they come due. Be sure to ask your lender in advance of closing how these items will be paid on a go-forward basis.
Title and Closing Charges (Section 1100)
These fees cover the administrative costs of a title search, title examination, issuance of the title commitment/binder and final title insurance policy(ies.) Also included would be charges for conducting the closing/settlement/escrow. You are free to select the company to conduct your closing/settlement/escrow, and to shop for the best pricing.
- Settlement/Closing Fee – A fee must be paid to a settlement agent who has prepared documents, calculated figures, and oversees proper execution of closing documents. This fee is often split between buyer and seller but can be negotiated as part of the sales contract. At Cypress Title, the title examination fee, commitment fee or binder fee, document preparation fee, notary fee and attorney fees are all included in one lump sum settlement fee of $400 for residential purchases and $300 for residential refinances. There are rare situations where the settlement fee charged by Cypress Title will be higher than the aforementioned figures (e.g., if excessive curative work is required to clear title).
- Abstract of Title, Search, Title Examination, Title Insurance Commitment or Binder – In order to ensure that there are no pre-existing problems with your property, a title insurance professional must perform a title search and produce documentation on the home’s title. In some places, one or more of these charges will appear separately on the HUD-1 and in other places they may be included within the title insurance premium. When a mortgage loan is involved, there may also be added charges for special endorsements that will accompany the lender’s title policy.
- Document Preparation – Some settlement agents charge for the cost of preparing legal papers such as the mortgage, deed of trust, note or deed and/or other loan and title documentation. If a lender charges a document preparation fee, it will typically appear in the Loan Fees/Direct Loan Costs section of the HUD-1.
- Notary Fee – Because there are legal documents involved, a licensed notary is required to acknowledge the fact that the proper people signed these official documents in their presence. Notaries often charge a fee for their services.
- Attorney Fees – Both the homebuyer and the seller might have their own legal representation to prepare and record legal documents. Frequently, however, where an attorney is acting as a settlement agent, there may only be one involved in the closing. Who pays for those services is a matter of contract negotiation but is often handled like fees paid to any other settlement agent/title agent.
- Title Insurance – There are two kinds of title insurance policies: Loan and Owner's policies. The cost for the Loan Policy is based on the loan amount and the cost for the Owner's Policy is based on the sales price of the home. In Louisiana, this cost is traditionally attributed to the purchaser of the home, while that is not always the case in other states.
Recording/Government Filing Fees (Section 1200)
Buying a home is not only a big investment, but it’s also a matter of public record. The property information and the loan information are required to be filed at the parish/county courthouse or other local government recording office.
- Recording Fees – The recording fee is paid to a government body, which enters an official record of the change of ownership.
- Transfer Taxes, Document or Transaction Stamps – These are government charges based on the amount of the mortgage and, often, also on the purchase price. Depending on your location, there could be a city, county or state tax involved, or some combination.
Other, Miscellaneous Charges (Section 1300)
- Survey Fee – Lenders and title insurers often require a surveyor to conduct a survey of your property to define the property size and boundaries and to see if any part of the building or other improvements are “encroaching” on a neighbor’s yard — or the other way around. They are also looking to see if there are any setback violations or other material matters that are considered problematic.
- Inspection Fees – When homes are sold, an inspection is often recommended and in some cases the contract may even be contingent upon an acceptable inspection report. This fee covers the cost of an inspector to check the dwelling for any structural problems or issues. Frequently, this is a sales contract term imposed by the homebuyer to obtain an accurate assessment of the condition of the property. The work is done prior to closing but the fee is often collected at closing. There are several inspections that a future homeowner might want to request and a lender might require. These could include pest inspections (termites and other wood-destroying organisms), lead paint inspections (for structures built before 1978), roof inspections, water/well certifications, structural or mechanical inspections, or additional specific inspections based on the property type and location.
- Storage Fee – This minimal fee is often charged by a title company for its cost of storing the information and documents in the closing package in digital form. As a result of modern technology, title companies now often times pay an independent third party storage facility to store the “hard” copies of the documents that were signed at closing as well as providing access to the contents of those documents over the Internet. This allows almost instantaneous access to the contents of any closing without the need to pull the actual “hard” file out of storage in a warehouse or other storage facility.
- Courier Fee – This fee encompasses the title company’s cost to transport the closing documents to the courthouse for recording in the conveyance and/or mortgage records. This fee also includes the costs borne by the title company to overnight and/or wire payoffs to the seller’s lender(s) so that the title company can secure a release of the outstanding mortgages.
- Tax Certificate Fee – In a purchase, this fee is charged for the title company’s work to confirm that the prior year’s property taxes have been paid by the current and former owners so that clear title may be passed from the seller to the buyer without the concern of a tax lien being filed that would encumber and cloud the title to the property. This fee also includes the title company’s efforts to determine the estimated taxes or prior year’s taxes that need to be pro-rated between the buyer and the seller at closing.