Buying a home, you likely anticipated needing a down payment and moving expenses, but you may not have considered the rather substantial fees and expenditures known as closing costs. Closing costs are explained below, as well as the ways and means of minimizing them, and possibly avoiding them all together.
What Are Closing Costs?
Closing costs are charges for services performed throughout the transaction, such as by the lender, the escrow agent, appraisers, inspectors, clerks, real estate agents, etc. For the most part, the service providers engage in the work without direct pay with the understanding that their fee will be paid as part of closing.
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Who Pays Closing Costs?
In most cases, it’s the buyer who assumes the responsibility of paying buyer closing costs. However, it’s not uncommon for buyer closing costs to be a negotiated issue. The agreement can be structured so that the seller pays part or all of the buyer closing costs out of the proceeds from the sale, as opposed to having the buyer pay those costs out-of-pocket or as an addition to the amount of the purchase loan.
How Much are Closing Costs?
The total of closing costs are normally in the range of two percent to five percent of the sale price. For a veteran, the total can be near-zero.
In the process of shopping for a lender, you can get details for loan costs and fees, which are likely to be more than 50% of your total closing costs. Given this information, your Realtor® can provide reasonably close estimates of your total closing costs for the purchase price range you are anticipating.
At least three days prior to close, the escrow agent will provide you with a “Closing Disclosure”, which will indicate the total cash required to close. On rare occasions, there are subsequent small changes to this amount because of slight differences in final service provider items. Such differences are handled by a check, by you or to you, after close. You will get a certified “Closing Statement” subsequent to close that will include all transaction items for both buyer and seller that will be the basis for your income tax return items.
When Are Closing Costs Due?
The buyer must deposit with the escrow agent the total cash to close somewhat prior to the close of the sale. Per the AAR Purchase contract, “closing” is the moment of recording of transaction documents with the County Recorder. Immediately thereafter, title to the property is transferred, the lender releases the funds for the purchase, the escrow agent dispenses payments to all service providers, keys are delivered to the buyer, etc.
Closing Costs and Home Loans
Typically, closing costs are not included in your home loan. However, some loan programs and financial institutions have loan programs in which your closing costs can be included as an addition to your home loan.
Closing Cost Terminology
Loan officer: When you apply for your home loan, a loan officer will assist in filling out the application, gathering the appropriate documents, ordering the credit report, ordering the appraisal and submitting the loan package for review. The appraisal fee is normally paid up-front and is not refundable in the event the transaction does not close. All other loan fees are normally paid at closing.
Credit Report: The loan officer orders a copy of your credit report from the credit reporting agencies. Each agency charges a fee, which the lender pays up-front and then recovers at closing.
Loan Processor and Underwriter: When the loan is approved, the loan processor generates the legal documents and contracts associated with the funds being borrowed by the buyer. The underwriter reviews all these documents plus the documents submitted by the buyer/borrower, such as pay stubs, tax returns, etc., to ensure that the borrower can repay the loan and otherwise meets the lender requirements.
Escrow Agent: The escrow agent is a third-party professional who manages the transaction … oversees the documents, collects all monies, arranges for insurance coverage and policies, gets statements from all service providers, etc., records documents to affect “closing”, then disburses all monies and documents to the respective parties.
Title Check: Before a house can be sold, its title has to be checked for tax hold or liens. There’s a fee for the service
Title Transfer: As with the title check, there’s a process for transferring the title from seller to buyer. There’s a fee for this service.
Lawyer: Very rarely involved in an Arizona residential real estate transaction. The Arizona process is so well defined, the expense is normally not justified.
Surveyor: A survey determines the property lines/boundary. In an Arizona metro area, property lines are so well defined that a surveyor is very rarely involved.
Appraiser: The appraiser assesses the property to provide an opinion of the current market value to the lender to verify that the house is worth the contract sales price. If the appraised value is less than the sales price, (1) the buyer may cancel, (2) the buyer can increase the down payment so that the loan-to-value ratio is acceptable to the lender, (3) the seller can reduce the price to the appraised value, or (4) some combination of (2) and (3).
Inspection: Where a home loan is involved, all lenders require that an inspection for termites be done; and if termites exist, that they be treated and a clearance certificate be deposited with escrow. Most buyer also have a physical inspection be done. Based on the results of that inspection, the buyer delivers a BINSR to the seller indicating any items “disapproved” and what the correction needs to be.
Real Estate Agent: The total commission for real estate agents is included in seller closing costs, from which the seller compensates the buyer’s agent.
This list is far from complete. Other costs typically include homeowner’s insurance, property taxes, private mortgage insurance, and more.
Your real estate agent is the best source of information about the closing process and costs. Give The Neal Team a call today at 602-931-1010 with any questions you have about these issues, any other aspects of buying or selling a home in the metro Phoenix area, or to tour available homes for sale.