Prepare For Closing
Once you and the seller have agreed in writing to the sales terms including the sales price, the closing process begins. The closing process is the time when all stakeholders in the transaction verify information and finalize the transfer of the property from one owner to another.
Closing on the purchase of your new home involves a good deal of coordination. Costs and fees are paid at closing to cover many of the elements that accompany the purchase. Usually your lender will help make your closing as smooth as possible and guide you through the process.
All closing costs are outlined in the Loan Estimate (LE) you receive — a written list of the approximate closing costs associated with your transaction, including charges from your lender, the local closing agent and other third parties. Closing costs may be added to the amount of your mortgage loan, and a seller may sometimes cover closing costs you would usually pay.
The closing process, which in different parts of the country is also known as "settlement" or "escrow" traditionally involves the buyer and seller meeting to complete the paperwork associated with the purchase and transfer of the property from one owner to another. However, it is an increasingly computerized and automated process and does not always require buyer and seller to attend in person.
All closing costs can be divided into two basic groups:
- State and local government charges and fees — These include city, county and state transfer taxes, recording fees, and property taxes.
- Mortgage costs — These include title insurance, survey, appraisals credit checks,loan origination and documentation fees, and commitment processing fees, and mortgage insurance and interest prepayments.
Typical Lender Fees
- Loan Origination Fee: A fee to cover the costs of evaluating and processing your mortgage loan.
- Points: A percentage of your loan amount, paid at closing.
- Appraisal Fee: The fee for having your new home appraised may be rolled into the closing costs. The cost may vary based on the amount of your loan, and the type and use of the property (i.e. condo, rental, etc).
- Credit Report: The fee for a credit bureau's detailed report of your credit history.
- Interest Payment: You may pay interest on your mortgage loan to cover the time between the closing date and the date your first mortgage payment period begins, because interest on a mortgage is usually paid in arrears — at the end of the time period it covers. For example: If closing is on May 15, and your first monthly payment starts to accrue interest on June 1, an interest payment covering the period between May 15 and May 31 may be required at closing. Consider this timing when scheduling your closing — it is a fee you can reduce by closing near the mortgage due date.
Typical Escrow Fees
- Escrow Account: A trust account created by a third party to hold money. We generally use the money to pay property taxes and insurance. To fund the account, your monthly mortgage payments may include 1/12 of annual property taxes and insurance charges, and the first escrow fee may be due at closing.
Typical Title Fees
- Title Search: The examination of public records to ensure that no one but the seller has a valid claim to the property.
- Title Insurance: Insurance that protects the lender and you from losses that may result from disputes over the property's title. Typically, you purchase the Lender Title Insurance.
Typical Other Third Party Fees
- Document Preparation Fee: A fee charged for the preparation of documents needed for the closing.
- Underwriting Fee: A fee to cover the costs of the underwriting process, which is the analysis of the risk involved in making a mortgage loan.
As you see, closing costs can be a complex issue, but your lender will provide you with a Loan Estimate (LE) that lists closing items and their approximate costs so that you know in advance what to expect. The details of the closing are handled by your lender and the various other professionals to help you prepare for a smooth closing.