Closing Costs on Mortgage Loans
“Closing” refers to the time at which the real estate contract (through which property is conveyed from the seller to the buyer) is executed, and the title is transferred to the buyer. Costs associated with the sale (above the cost of the property itself), payable by the buyer and/or seller, are usually paid at closing and are referred to as “loan closing costs.”
Mortgage Loan Closing costs typically include:
Survey Fees: To verify lot size and dimensions, and to check for encroachments, institutional/commercial lenders usually require a survey of the land and all structures on it. Survey fees may be paid by either party.
Mortgage Application Fees: Mortgage application fees cover the cost of processing the loan application and are paid by the buyer to the mortgage lender. Mortgage application fees are sometimes paid prior to closing.
Attorney (Legal) Fees: Institutional/commercial lenders usually require the buyer and/or seller to hire attorneys to ensure that documents are prepared and registered (recorded) properly and in accordance with the law. Attorney fees are payable by the buyer, seller, or both, depending on the situation.
Recording Fees: The government requires that all real estate transactions (transfer of property ownership) be officially recorded. Recording fees may be paid by either party.
Document or Transfer Charges: The government charges an excise tax upon property transactions, payable by either party or both, depending on the location. This is also known as a stamp or transaction tax.
Inspection Fees: Some lenders require inspection of the property to ensure that it is in good condition (so that it will retain the collateral value necessary to secure the loan). Inspection fees are usually paid by the buyer.
Appraisal Fees: Most lenders require that a licensed appraiser inspect the property to ensure that the sale price accurately reflects (is equal to or lower than) the property’s market value. Appraisal costs are usually paid by the buyer, although this can be negotiated.
Title Services Fees: Title services primarily consist of a title search (close examination of the historical records concerning the property, to make sure the title is clear and uncontestable) and title insurance (protection against an inaccurate title search). If title services are provided by the same attorneys who handle the transaction documentation, then title service fees might be included in attorney fees. Responsibility for the title services fees is often determined by the real estate contract, but the default position is that these fees are the responsibility of the seller.
Pro-Rated Interest Fees: If, as is usually the case, the closing date does not fall on the date that the monthly mortgage payment is due, then an adjustment is required to calculate loan interest for the extra days until the first payment is due. Pro-rated interest fees are paid by the buyer.
Pro-Rated Property Taxes: Real property tax payments (assessed by most jurisdictions) are usually due annually, on a date different from the closing date. Thus, most real estate transactions involve an adjustment to ensure that both parties pay their requisite share of the property tax (based on the percentage of the transaction year that each owns the property). Such an adjustment is usually required by lenders and/or the real estate contract, and these taxes may be paid by the buyer, the seller, or both.
Pro-Rated Homeowner Association Dues: If the property is protected under a Homeowners Association, then annual dues during the year of the property transfer require the same sort of adjustment as property taxes, with each party paying a portion of the dues (based on the percentage of the year each owned the property).
Broker’s Commission: The real estate broker receives compensation for his/her services (marketing the house, finding a buyer, handling negotiations, etc.), usually on a commission basis, or a percentage of the final sale price. The amount of the percentage is determined in the listing agreement between seller and brokerage, and the listing agent may share part of his/her commission with the buyer’s agent. The broker’s commission is payable by the seller and often represents one of the largest closing costs.
Home Warranties: To make their property more marketable, sellers will sometimes offer buyers a warranty, insuring major property systems against repair or replacement for a year after the property is sold. Alternatively, some buyers purchase home warranties after closing. Thus, home warranty costs, if applicable, may be payable by the seller or the buyer, depending on the transaction terms.
Points: “Points” refers to a type of pre-paid interest, in which the lender offers a lower rate of interest on the mortgage loan in exchange for an upfront payment. The size of the payment varies according to the number of “points,” with each point representing one percent of the loan principal. Thus, points, if applicable, are paid by the buyer to the lender.
Pre-Paid Property Insurance: Lenders usually insist that a mortgaged property be fully insured for the life of the mortgage, and often require the first year’s property insurance premium be paid in advance. In some cases, the buyer pays the insurance company directly; otherwise, pre-paid property insurance becomes part of the closing costs, payable by the buyer.
These are the most common kinds of closing costs, but different jurisdictions may entail different or additional fees, and some transactions may include unusual closing costs not listed here. When financing a real estate transaction with a mortgage loan, the federal government requires that all closing costs be carefully documented. The forms and notifications required vary, so buyers and sellers should consult their agents and/or local property laws to ensure that they properly meet all government documentation requirements.
