What to expect at closing
Who are all these people with their hands out? Do I really need them? What’s it going to cost me? Here's information to help demystify the closing process – and all those fees – when you buy a home.
You're finally wrapping up your home purchase. Congratulations. Before it's officially yours, though, you have one last hurdle: the mysterious process known as "closing" or "settlement." Open your wallet and hold onto your hat.
"Closing costs" — the catch-all term for a host of fees, taxes and charges — can total 2% to 6% or more of your purchase price — $4,000 to $12,000 on a $200,000 mortgage. That means you'll need to budget a chunk of money besides your down payment.
Costs vary by region and by what you negotiate. Buyers usually pay most fees, but sellers may pay some, too. Buyers often get lenders to contribute, too. Be aware, however, that lenders offering a "zero-closing-cost" loan usually charge a higher interest rate.
Closing starts when you sign a purchase contract. It ends about four to eight weeks later, at a closing meeting (or conference) where you sign papers on your loan; pay fees, taxes and services to finalize the sale; and receive the keys and deed to your new home.
Who's in charge?
A professional settlement agent orchestrates a closing. The agent files documents, pays taxes on your behalf, ensures every task is done and recorded in the time specified by law, and also may hire an appraiser, pest inspector and other professional services. The agent represents the buyer, the seller and the lender equally.
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In some states, the agent must be an attorney. In others, it's an independent settlement or escrow company. (An escrow company is one licensed by the state to hold money and documents.) In many states, title companies — whose primary jobs are to make sure there are no claims on the property and to sell insurance guaranteeing that the title is clear — may be the settlement agent.
States' requirements vary:
- In New York, only an attorney — usually a specialized "closing attorney" — oversees a closing.
- In Nevada, as in most states, title companies act as the settlement agent.
- In California and Wyoming, escrow companies are used.
The federal forms and rules used to disclose your loan costs and closing fees, however, are identical in every state:
- Your lender must give you a binding good-faith estimate (PDF file), or GFE, within three business days after you apply for a loan. It shows loan costs and estimates your other closing costs. Your final origination charges and transfer taxes can't vary from this estimate. Quotes for other services may vary by up to 10%. Bigger variations are a "tolerance violation" and the lender must credit you the difference within 30 days of your closing, says Cathy Blaszyk, vice president for lender services at Closing.com.
- At your closing, the settlement agent will give you a HUD-1 form (PDF file) showing your final costs. The chart on page 3 helps you compare the good-faith estimates with your final charges.
- MSN Money: 4 ways to save on closing costs
Most of these fees are negotiable, and you can shop separately for many of them.
"The consumer has to open their eyes, because they can save a lot of money," Blaszyk says. "People spend more time shopping for a big-screen TV." Closing.com's closing costs calculator lets you plug in home-purchase information to get numerous estimates and quotes on closing services from providers near you.
By shopping aggressively, you might:
- Qualify for a better interest rate than you'd expected.
- Find that a loan offer with a higher interest rate is really the best deal when all closing costs are considered.
- Spot "junk" fees.
- Find lower rates on services such as title insurance, settlement services or inspections.
- Use these lower bids to negotiate better prices with your lender.
Start shopping for settlement services and for additional loan offers once you've made one mortgage-loan application. A lender must stick to its good-faith estimate for 10 days. "The bank or broker can't go back and make changes, which gives the borrower a chance to make comparisons," says Jeanne Stell, head of compliance for Allied Home Mortgage Capital Corp., a lending company.
- On our blog, 'Listed': Banks' dirty little secret: High-priced insurance
Don't worry about hurting your credit score by making numerous loan applications. In "4 credit-scoring myths," personal finance guru and MSN Money contributor Liz Pulliam Weston says that your FICO score will register multiple inquiries in a 45-day period as just one inquiry. Applying is free, except maybe for the cost of pulling your credit report — about $15, tops. Lenders can't collect application or appraisal fees while you're comparison shopping.
Although recent changes in federal law make it harder for lenders to pad fees, you should still get expert help in reviewing offers and closing documents. "The key is getting somebody who is trained and who can comprehensively look at it for you," says Debra Pogrund Stark, a professor and real-estate law expert at John Marshall Law School in Chicago.
In advance, line up either of these:
- A real-estate attorney through the American Bar Association lawyer locator (choose "real estate" under the "areas of practice" drop-down menu) or find referrals from a state or local bar association (search H.G. legal directories).
- A free, housing counselor certified by the Department of Housing and Urban Development (call 800-569-4287 or use this HUD map to find a nearby agency).
Wow, this is actually a very good and informative article. I am in the Mortgage Business and a lot of things I read online are so way off base it's not even funny. If you know someone buying a home forward them this article, it will be very helpful. In fact I am sending this to the people I am working with now. Good job MSN !
Closing? The list of surrealist extra's you are charged because they want to and can get away with it. The extra price you pay to be ripped off.
The taxes associated with the house makes up a portion of the closing cost along with the commission charged and the lender origination fees.
All of these are based on the amount the property cost.