Final Steps & Closing Costs
Signing Loan and Closing documents are the final steps before the sale is legally completed and placed in the new Buyer’s name. Signing these documents usually takes place at the Escrow Company’s office. Buyers are required to sign at least three days prior to Closing to ensure the sale is completed on time.
There are a number of documents Buyers must sign before Closing, particularly if a loan is involved. The most important document is the closing statement which the US Government calls a “HUD-1”. The HUD-1 details all of the financial aspects of the sale, lists the Closing Costs and who is responsible for paying them (Buyer or Seller).
The HUD-1 will show the price of the home, the down payment due on the loan and the Buyer’s Closing Costs. The Buyer is responsible for payment of all Lender Fees and a portion of the Escrow/Transaction fees. Here is a summary of Closing Costs typically paid by the Buyer:
Escrow & Recording Fees: The Escrow Fee is split between the Buyer and Seller and compensates the Escrow Company for managing the transaction. The Recording Fee is charged by the County and is also split between the Buyer and Seller.
Title Insurance: The Seller pays for and provides Title Insurance to the Buyer. Title Insurance protects against any old ownership claims that might be made on the property. The Lender will also require Title Insurance and the Buyer is responsible for this cost.
Lender Fees: The Lender charges a fee for obtaining the loan, often called a Loan Origination Fee. Some Lenders charge a single Fee while others break down the costs into several categories. The Appraisal Fee may be included on the closing statement but it is often paid for by the Buyer prior to closing.
Insurance: Homeowner’s Insurance protects the Buyer and Lender against any major damages. Homeowner’s Insurance must be paid in advance, and the Buyer is charged for one year of Homeowner’s Insurance on the HUD-1.
Impound Accounts: There are two costs of owning a home that the Lender wants to make absolutely sure are being paid: Real Estate Taxes and Insurance. If Real Estate Taxes are not paid, the County can foreclose on the property and we already discussed the importance of insuring the home.
In order to ensure Taxes and Insurance are paid, the Lender will require that payments for these costs are included in your monthly mortgage payment. Approximately 1/12 of the anticipated cost of taxes and insurance are included in your monthly payment so the Lender has the funds to pay them when they are due.
The Lender will usually require that at least two months of Insurance and Tax Payments are charged to the Buyer on the closing statement in order to start the Impound Accounts as it will be almost two months before the Buyer’s first payment is due.
Prepaid Interest: Interest is included with your monthly payment and is paid in “arrears”. This is the opposite of payment in advance. Monthly Rental payments, for example, are payments in advance as they are for the upcoming month.
Payment in arrears means that when you make your monthly payment on the 1st of the month, the interest included in that payment is for the prior month.
For example, let’s assume that the purchase of your home completed on January 15th. Your first mortgage payment will be due on March 1st, and the interest included in that payment is for the prior month (February). But when is the interest collected for the period 1/15 to 1/31?
The Lender collects this interest at closing. The amount will vary quite a bit depending on when you close in the month. If your closing is on January 3rd then you would pay almost an entire month’s interest at closing. But your next payment will be almost two months later, on March 1st. Closing towards the end of the month will lower the amount due for prepaid interest but there will be fewer days until your next payment is due.
Total Buyer Closing Costs will usually range from $4,000 to $6,000 depending on Lender Fees and the closing date, which affects prepaid interest. Buyers, particularly those obtaining VA or FHA loans, will often request the Seller pay a portion of their closing costs on their behalf. These terms are negotiated at the time of the offer.
If there is an amount due by the Buyer it is collected at the time of signing. The payment must be “certified funds”, which means a wire, Money Order or Cashier’s Check. Your Realtor will have an advance copy of the HUD-1 to review with you that will show the amount due, if any, at closing.
What’s next? The Escrow Officer makes sure that all funds for the sale have been received and that all of the documents have been signed. Once this is completed the Escrow Officer can “close” the transaction.
Closing means that the sale has been recorded and the Deed transferred into the Buyer’s name. The Escrow Officer confirms that the transfer has been made and lets the Agent know to release the keys to the Buyer.
And that’s it! The Keys and the Home are Yours!