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Closing Costs & Information
Congratulations! You have decided to buy a new home. This will help you take this big financial step by describing the home buying, home financing, and settlement process. Lenders and mortgage brokers are required by federal law, the Real Estate Settlement Procedures Act (RESPA), to give you this informaation. You should receive it when applying for a loan, or within three business days afterwards. Real estate brokers frequently hand out a booklet as well. You probably started the home buying process in one of two ways: you saw a home you were interested in buying or you consulted a lender to figure out how much money you could borrow before you found a home (sometimes called pre-qualifying). The next step is to sign an agreement of sale with the seller, followed by applying for a loan to purchase your new home. The final step is called settlement or closing, where the legal title to the property is transferred to you. At each of these steps you often have the opportunity to negotiate the terms, conditions and costs to your advantage. This will highlight such opportunities. You will also need to shop carefully to get the best value for your money. There is no standard home buying process used in all localities. Your actual experience may vary from those described here. This takes you through the general steps to buying a home, to eliminate, as much as possible, the mysteries of the settlement process.
Buying and Financing a Home
Frequently, the first person you consult about buying a home is a real estate
agent or broker. Although real estate brokers provide helpful advice on many
aspects of home buying, they may serve the interests of the seller, and not your
interests as the buyer. The most common practice is for the seller to hire the
broker to find someone who will be willing to buy the home on terms and conditions
that are acceptable to the seller. Therefore, the real estate broker you are
dealing with may also represent the seller. However, you can hire your own real
estate broker, known as a buyers broker, to represent your interests. Also, in
some states, agents and brokers are allowed to represent both buyer and seller.
Even if the real estate broker represents the seller, state real estate licensing
laws usually require that the broker treat you fairly. If you have any questions
concerning the behavior of an agent or broker, you should contact your States
Real Estate Commission or licensing department. Sometimes, the real estate broker
will offer to help you obtain a mortgage loan. He or she may also recommend that
you deal with a particular lender, title company, attorney or settlement/closing
agent. You are not required to follow the real estate brokers recommendation.
You should compare the costs and services offered by other providers with those
recommended by the real estate broker.
Before you sign an agreement of sale, you might consider asking an attorney to
look it over and tell you if it protects your interests. If you have already
signed your agreement of sale, you might still consider having an attorney review
it. An attorney can also help you prepare for the settlement. In some areas attorneys
act as settlement/closing agents or as escrow agents to handle the settlement.
An attorney who does this will not solely represent your interests, since, as
settlement/closing agent, they may also be representing the seller, the lender
and others as well.
*Please note, in many areas of the country attorneys are not normally involved
in the home sale. For example, escrow agents or escrow companies in western states
handle the paperwork to transfer title without any attorney involvement. If choosing
an attorney, you should shop around and ask what services will be performed for
what fee. Find out whether the attorney is experienced in representing home buyers.
You may wish to ask the attorney questions such as: What is the charge for negotiating
the agreement of sale, reviewing documents and giving advice concerning those
documents, for being present at the settlement, or for reviewing instructions
to the escrow agent or company? Will the attorney represent anyone other than
you in the transaction? Will the attorney be paid by anyone other than you in
the transaction?
Terms of the Agreement of Sale
If you receive this information before you sign an agreement of sale, here are some important points to consider. The real estate broker probably will give you a preprinted form of agreement of sale. You may make changes or additions to the form agreement, but the seller must agree to every change you make. You should also agree with the seller on when you will move in and what appliances and personal property will be sold with the home.
Sales Price. For most home purchasers, the sales price is the most important term. Recognize that other non-monetary terms of the agreement are also important. Title. Title refers to the legal ownership of your new home. The seller should provide title, free and clear of all claims by others against your new home. Claims by others against your new home are sometimes known as liens or encumbrances. You may negotiate who will pay for the title search which will tell you whether the title is "clear."
Mortgage Clause. The agreement of sale should provide that your deposit will
be refunded if the sale has to be canceled because you are unable to get a mortgage
loan. For example, your agreement of sale could allow the purchase to be canceled
if you cannot obtain mortgage financing at an interest rate at or below a rate
you specify in the agreement. Pests. Your lender will require a certificate from
a qualified inspector stating that the home is free from termites and other pests
and pest damage. You may want to reserve the right to cancel the agreement or
seek immediate treatment and repairs by the seller if pest damage is found.
Home Inspection. It is a good idea to have the home inspected. An inspection
should determine the condition of the plumbing, heating, cooling and electrical
systems. The structure should also be examined to assure it is sound and to determine
the condition of the roof, siding, windows and doors. The lot should be graded
away from the house so that water does not drain toward the house and into the
basement. Most buyers prefer to pay for these inspections so that the inspector
is working for them, not the seller. You may wish to include in your agreement
of sale the right to cancel, if you are not satisfied with the inspection results.
In that case, you may want to re-negotiate for a lower sale price or require
the seller to make repairs. Lead-Based Paint Hazards in Housing Built Before
1978. If you buy a home built before 1978, you have certain rights concerning
lead-based paint and lead poisoning hazards. The seller or sales agent must give
you the EPA pamphlet Protect Your Family From Lead in Your Home or other EPA-approved
lead hazard information. The seller or sales agent must tell you what the seller
actually knows about the homes lead-based paint or lead-based paint hazards and
give you any relevant records or reports.
You have at least ten (10) days to do an inspection or risk assessment for lead-based
paint or lead-based paint hazards. However, to have the right to cancel the sale
based on the results of an inspection or risk assessment, you will need to negotiate
this condition with the seller.
Finally, the seller must attach a disclosure form to the agreement of sale which
will include a Lead Warning Statement. You, the seller, and the sales agent will
sign an acknowledgment that these notification requirements have been satisfied.
Other Environmental Concerns. Your city or state may have laws requiring buyers
or sellers to test for environmental hazards such as leaking underground oil
tanks, the presence of radon or asbestos, lead water pipes, and other such hazards,
and to take the steps to clean-up any such hazards. You may negotiate who will
pay for the costs of any required testing and/or clean-up.
Sharing of Expenses. You need to agree with the seller about how expenses related
to the property such as taxes, water and sewer charges, condominium fees, and
utility bills, are to be divided on the date of settlement. Unless you agree
otherwise, you should only be responsible for the portion of these expenses owed
after the date of sale. Settlement Agent/Escrow Agent or Company. Depending on
local practices, you may have an option to select the settlement agent or escrow
agent or company. For states where an escrow agent or company will handle the
settlement, the buyer, seller and lender will provide instructions.
Settlement Costs. You can negotiate which settlement costs you will pay and which
will be paid by the seller.
Shopping For a Loan
Our choice of lender and type of loan will influence not only your settlement
costs, but also the monthly cost of your mortgage loan. There are many types
of lenders and types of loans you can choose. You may be familiar with banks,
savings associations, mortgage companies and credit unions, many of which provide
home mortgage loans. You may find a listing of some mortgage lenders in the yellow
pages or a listing of rates in your local newspaper.
Mortgage Brokers.
Some companies, known as mortgage brokers offer to find you
a mortgage lender willing to make you a loan. A mortgage broker may operate as
an independent business and may not be operating as your agent or representative.
Your mortgage broker may be paid by the lender, you as the borrower, or both.
You may wish to ask about the fees that the mortgage broker will receive for
its services.
Government Programs.
You may be eligible for a loan insured through the Federal
Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs
or similar programs operated by cities or states. These programs usually require
a smaller down payment. Ask lenders about these programs. You can get more information
about these programs from the agencies that run them.
CLOs. Computer loan origination systems, or CLOs, are computer terminals sometimes
available in real estate offices or other locations to help you sort through
the various types of loans offered by different lenders. The CLO operator may
charge a fee for the services the CLO offers. This fee may be paid by you or
by the lender that you select. Types of Loans. Loans can have a fixed interest
rate or a variable interest rate. Fixed rate loans have the same principal and
interest payments during the loan term. Variable rate loans can have any one
of a number of indexes and margins which determine how and when the rate and
payment amount change. If you apply for a variable rate loan, also known as an
adjustable rate mortgage (ARM), a disclosure and booklet required by the Truth
in Lending Act will further describe the ARM. Most loans can be repaid over a
term of 30 years or less. Most loans have equal monthly payments. The amounts
can change from time to time on an ARM depending on changes in the interest rate.
Some loans have short terms and a large final payment called a balloon. You should
shop for the type of home mortgage loan terms that best suit your needs.
Interest Rate, Points & Other Fees. Often the price of a home mortgage loan is
stated in terms of an interest rate, points, and other fees. A point is a fee
that equals 1 percent of the loan amount. Points are usually paid to the lender,
mortgage broker, or both, at the settlement or upon the completion of the escrow.
Often, you can pay fewer points in exchange for a higher interest rate or more
points for a lower rate. Ask your lender or mortgage broker about points and
other fees.
A document called the Truth in Lending Disclosure Statement will show you the
Annual Percentage Rate (APR) and other payment information for the loan you have
applied for. The APR takes into account not only the interest rate, but also
the points, mortgage broker fees and certain other fees that you have to pay.
Ask for the APR before you apply to help you shop for the loan that is best for
you. Also ask if your loan will have a charge or a fee for paying all or part
of the loan before payment is due (prepayment penalty). You may be able to negotiate
the terms of the prepayment penalty. Lender-Required Settlement Costs. Your lender
may require you to obtain certain settlement services, such as a new survey,
mortgage insurance or title insurance. It may also order and charge you for other
settlement-related services, such as the appraisal or credit report. A lender
may also charge other fees, such as fees for loan processing, document preparation,
underwriting, flood certification or an application fee. You may wish to ask
for an estimate of fees and settlement costs before choosing a lender. Some lenders
offer no cost or no point loans but normally cover these fees or costs by charging
a higher interest rate.
Comparing Loan Costs. Comparing APRs may be an effective way to shop for a loan.
However, you must compare similar loan products for the same loan amount. For
example, compare two 30-year fixed rate loans for $100,000. Loan A with an APR
of 8.35% is less costly than Loan B with an APR of 8.65% over the loan term.
However, before you decide on a loan, you should consider the up-front cash you
will be required to pay for each of the two loans as well.
Another effective shopping technique is to compare identical loans with different
up-front points and other fees. For example, if you are offered two 30-year fixed
rate loans for $100,000 and at 8%, the monthly payments are the same, but the
up-front costs are different:
Loan A - 2 points ($2,000) and lender required costs of $1800 = $3800 in costs.
Loan B - 2 1/4 points ($2250) and lender required costs of $1200 = $3450 in costs.
A comparison of the up-front costs shows Loan B requires $350 less in up-front
cash than Loan A. However, your individual situation (how long you plan to stay
in your house) and your tax situation (points can usually be deducted for the
tax year that you purchase a house) may affect your choice of loans.
Lock-ins. Locking in your rate or points at the time of application or during
the processing of your loan will keep the rate and/or points from changing until
settlement or closing of the escrow process. Ask your lender if there is a fee
to lock-in the rate and whether the fee reduces the amount you have to pay for
points. Find out how long the lock-in is good, what happens if it expires, and
whether the lock-in fee is refundable if your application is rejected.
Tax and Insurance Payments. Your monthly mortgage payment will be used to repay
the money you borrowed plus interest. Part of your monthly payment may be deposited
into an escrow account (also known as a reserve or impound account) so your lender
or servicer can pay your real estate taxes, property insurance, mortgage insurance
and/or flood insurance. Ask your lender or mortgage broker if you will be required
to set up an escrow or impound account for taxes and insurance payments. Transfer
of Your Loan. While you may start the loan process with a lender or mortgage
broker, you could find that after settlement another company may be collecting
the payments on your loan. Collecting loan payments is often known as servicing
the loan. Your lender or broker will disclose whether it expects to service your
loan or to transfer the servicing to someone else.
Mortgage Insurance. Private mortgage insurance and government mortgage insurance
protect the lender against default and enable the lender to make a loan which
the lender considers a higher risk. Lenders often require mortgage insurance
for loans where the down payment is less than 20% of the sales price. You may
be billed monthly, annually, by an initial lump sum, or some combination of these
practices for your mortgage insurance premium. Ask your lender if mortgage insurance
is required and how much it will cost. Mortgage insurance should not be confused
with mortgage life, credit life or disability insurance, which are designed to
pay off a mortgage in the event of the borrowers death or disability. You may
also be offered lender paid mortgage insurance (LPMI). Under LPMI plans, the
lender purchases the mortgage insurance and pays the premiums to the insurer.
The lender will increase your interest rate to pay for the premiums -- but LPMI
may reduce your settlement costs. You cannot cancel LPMI or government mortgage
insurance during the life of your loan. However, it may be possible to cancel
private mortgage insurance at some point, such as when your loan balance is reduced
to a certain amount. Before you commit to paying for mortgage insurance, find
out the specific requirements for cancellation.
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