SAVING MONEY IN REAL ESTATE CLOSINGS

A home is the biggest purchase most people will ever make, but a lot of buyers don’t realize that the home’s price is only part of what they’ll have to pay. Closing costs in home purchases can add another 2 to 7 percent to the total. That’s a lot of money. Sellers may face closing costs as well.

Fortunately, you can take steps to keep a lid on these costs. Whether you’re buying or selling, your lawyer can watch out for your interests. Read on for some tips on ways to save.

Q. What happens at the closing?

A. The real estate closing (sometimes called the settlement) is the final stage in the process of buying a home. The closing is a meeting at which the buyer and seller, usually accompanied by their respective lawyers and real estate agents, complete the sale. At this meeting, the seller sells, the buyer buys, and the lender lends. The buyer usually signs the promissory note and mortgage and obtains the lender’s proceeds. The buyer is then able to make all the required payments due to the seller. The seller produces all documents necessary for the transfer of good title and delivers a deed that transfers the title to the buyer.

Q. What are closing costs, and who pays them?

A. These costs vary depending on local custom and the specific terms of the purchase agreement. They usually include all or most of the following:

Appraisal fee-This is the fee paid for an appraisal of the property. It is required by the lender and is often paid for by the borrower (buyer). The Federal Housing Administration and Veterans Administration establish the appraisal fees for mortgages that they guarantee.

Survey fee-The purchase contract should specify whether the seller is obligated to provide a survey. If the seller is not, the buyer may need to obtain and pay for a survey, for his or her own use and to satisfy the lender. You may be able to avoid this fee if the lender agrees to accept a recent survey done for the seller, along with an affidavit of the seller stating that the property lines have not changed since the completion of the survey and there have been no additional improvements to the property since the survey was taken.

Loan discount fee-This is the lender’s charge to the buyer to obtain the loan, sometimes referred to as points or the loan origination fee. The buyer may have paid some of this fee in advance to secure the loan.

Inspection fees-Charges for general inspections or inspections required by local laws. The buyer or seller may be responsible for these fees depending on the contract and local law and custom.

Title fees/title insurance-Title searches or title insurance are important to assure that the buyer has received good title to the property, without defects that would lower its value. The contract needs to spell out who is to pay the cost of title insurance or fees. Often, it is divided between the seller and buyer. In some states, the seller pays for the buyer’s title insurance policy and the buyer pays for the lender’s policy. In other states, the buyer pays all charges related to title insurance.

Transfer taxes-A tax imposed by the state, county or city where the property is located, on the transfer of the deed and in some cases, on the mortgage.

Recording fees-The buyer usually pays the costs of recording the deed in order to change ownership and recording the buyer’s mortgage. The seller pays the cost of recording the release of the seller’s mortgage by the seller’s lender and recording the release of any other liens found in the record of title.

Q. Are there other costs?

A. There may be. Other common fees include:

• Loan origination fee to cover the lender’s administrative costs in processing
  the loan
• Credit report fee to cover the cost of a report from a credit bureau showing the buyer’s credit history
  
• Mortgage insurance application fee to cover the cost of processing the application for private mortgage insurance that may be required on loans with a down payment of less than 20% of the purchase price
  
• Mortgage insurance premium
  
• Hazard insurance premium
  
• Closing fee payable to the closing agent

Buyers may also have to put money into escrow with their lender to assure future payment of such recurring items as real estate taxes and insurance. Also, there are often separate lender document fees that cover the preparation of final legal papers such as the promissory note and mortgage or deed of trust. Finally, there may be conveyance taxes, which are charges levied on the transaction by the municipality or state. In some jurisdictions, you may have to buy tax stamps covering such charges. These taxes may also be charged on the amount of the mortgage.

Q. What costs is the seller responsible for?

A. Generally, the seller is responsible for paying the real estate agent’s commission on the sale, real estate taxes on the property to the date of closing, certain transfer taxes and any liens that may be outstanding on the property, including any money due the current lender.

Q. What’s the best way to keep costs down?

A. Know your rights, get good advice, negotiate, and shop for the best deal.

The purchase contract can allocate many fees to either the buyer or the seller. You and you lawyer can try to shift as many of these as you can in the negotiating process on the contract.

Many of the fees relate to obtaining the mortgage. Though federal law requires lenders to tell you the annual rate of the loan (APR), there are a large number of additional fees that can be applied and add greatly to your costs. You’ll typically pay these at the closing. Unfortunately, the lender is not legally required to give you the final APR (which factors in these fees) until the loan is consummated, usually at the closing.

When you’re shopping for your loan, ask about all these fees and find out how much they add up to. Experienced lenders will provide a rough estimate of closing expenses before you apply for a loan. Factor that into your comparison shopping. You may well be able to find a lender with as good an APR that doesn’t charge these fees.

A federal law—the Real Estate Settlement Procedures Act (RESPA)—steps in to protect you after you have chosen a loan. It requires a lender to give you a good faith estimate of closing costs within three days after you apply for a loan. This estimate includes the cost of appraisal, credit reports, title work and other services.

Unfortunately, this is only an estimate, and fees may go up at the closing. Lenders are required to provide you with a more detailed list of costs at least one day before settlement.

Your best bet is to protect yourself from high closing costs. Comparison shop for a loan, try to shift closing costs while negotiating the purchase, ask questions about anything you don’t understand, and be an alert consumer all the way through the transaction.