Closing Costs

Closing costs, or the fees associated with buying and selling real estate property, can be divided into three basic categories; lender fees, prepaid and settlement costs. 

Lender fees may include points, appraisal, credit reporting, underwriting, settlement and tax service fees.  Prepaid fees may include interim interest, real estate taxes and escrow, and insurance premiums and escrow.  Settlement fees may include title insurance, settlement or attorney fees, taxes, recordation and messenger fees.

As with many elements of a real estate transaction, closing costs are negotiable.  They can be paid by the buyer, the seller or any combination of these two parties.

Some of the more common types of closing costs are described below, although many other types of costs can come into play.  Closing costs are individual to a piece of property, and hence will differ according to region, property type, and numerous other factors.  As always, it is important to discuss closing costs with your agent and lender in order to be fully informed regarding your particular situation.

Commission fees may be paid to real estate agents representing the buyer and seller of a piece of property.  Property taxes must also be paid by the seller (usually), until the last day of ownership.  A new homeowner's insurance policy must also be purchased, usually by the buyer.  Any assessments or liens on the property in question should be taken care of prior to the close of escrow, and are usually paid for by the seller.

Escrow services and title insurance must also be settled.  Other fees may include, but are not limited to, property inspection fees, termite inspection, termite removal, document preparation fees, deed recording fees, loan assumption charges, home warranty and utility adjustments.

Closing costs for sellers usually comes down to commissions plus approximately 2% of the sales price of the property.  For buyers, closing costs usually amount to 3% of the sales price.

Escrow

Escrow is "a deed, a bond, money or a piece of property held in trust by a third party to be turned over to the grantee only upon fulfillment of a condition," as defined by Webster.

It exists to provide confidentiality and impartiality during a real estate transaction.  Escrow exists because buyers, sellers and lenders have a personal stake in the outcome of any real estate transaction.  It is important to have a neutral party ensuring that all requirements for a successful transaction are met.

Escrow is this neutral third party, designed to assist buyers, sellers and lenders in meeting all of the mutually agreed upon terms and conditions.  The escrow holder is used as a depository.  Buyers and sellers provide funds, deeds, inspection reports, insurance information and any other related documentation to escrow.  They then give the escrow officer written instructions that must be met prior to completion of the transaction (recordation).

Escrow begins once a buyer and seller successfully negotiate an offer.  Once the seller accepts an offer, the buyer deposits earnest money into escrow.

A title report is ordered after escrow is opened.  This is a search to ensure the seller actually owns the property in question.  The title search exists to determine if there are any liens against the property.  It also looks to see if there are any breaks in the chain of title.

Any applicable financing is now processed.  After obtaining loan approval, the lender prepares the loan instructions and documents, and sends them to escrow.  Inspections are completed and insurance information is gathered and processed.  New insurance policies are set up for the new owner (including title insurance, homeowner's insurance, and any other applicable or desired coverage).

After inspections and insurance have been obtained, a loan agreement has been reached and a title search has been completed, the next step begins.  The escrow officer will review the file to determine that all contractual conditions have been met, the lender's instructions have been followed, and all title requirements have been satisfied.  Closing documentation is then prepared.

Both buyer and seller will sign all related documentation.  The buyer will then submit all closing funds into escrow (although this can also be done by the seller or in combination).  The lender deposits the loan funds into the escrow account.  Escrow then authorizes the release of recording.

Documents are recorded at the county recorders office.  Funds are disbursed in accordance with the Disclosure/Settlement Statement, and the final documentation is forwarded to all interested parties.  Escrow is then deemed closed.

Homeowner's Insurance

Most lenders require homebuyers to carry homeowner's insurance.  This is a hazard insurance policy designed to cover your property against peril. 

Most homebuyers elect to take out a comprehensive homeowner's insurance policy.  This type of coverage covers the cost of rebuilding your home, your possessions, liability, vandalism, theft, water damage (not flood related) and loss of use.  There are three basic areas this type of insurance is designed to cover.

Casualty:  If your home should be damaged or destroyed (most frequently due to fire), your insurance will cover the cost of rebuilding your home.  This is usually based on the square footage of your dwelling space (which can be found on the appraisal report).  It is important to note that your coverage amount is not based on the amount you paid for the home, or the amount of your mortgage.

Keep in mind that your insurance policy likely doesn't cover rising water (flood) or earth movement (earthquake).  Separate insurance policies can be purchased to cover these occurrences.

Personal Property:  Your insurance policy also will likely cover up to a specific amount towards the replacement of your personal belongings in your home, similar to renter's insurance.  It is important to ask your insurance agent which items may not be covered under this portion of your insurance.  In most cases, a separate policy can be purchased to cover any items not falling under the purview of this portion of your coverage.  One example may be an expensive item of jewelry.

Liability:  As a property owner, you are liable for any accidents which may occur on your property.  If a guest or passerby slips on a patch of ice on your front porch or falls off your staircase, you are liable for their injuries.  This is also covered under your homeowner's insurance.

Remember to compare insurance rates.  Ask your insurance agent any questions you may have regarding coverage and loss, limitations, deductibles and the like.  Your real estate agent will be able to point you towards a reputable insurance agent.

Title Insurance

Property Ownership - How Secure Are You?

Real estate is traditionally a family's most valuable asset, and many laws have been passed to protect it.  While most of these laws are set up to protect the owner, their family and heirs, others may have claim on the property.

In certain situations, governmental bodies, contractors, lenders, judgment creditors and the Internal Revenue Service may also lay claim to property, sometimes without the owner even being aware of it.

An owner's title insurance policy provides homeowners with coverage against most of these occurrences.  Title insurance is sometimes the difference between actually owning a property and just thinking you do.

Title Search - The First Step

Before you buy a piece of real estate, a complete investigation of the property is completed.  This includes a title inspection.

A title search is a complicated procedure, involving a thorough examination of records covering all recorded judgments, street and sewer assessments, taxes and anything else related to assuring proper ownership, including chain of title of the property.

Ideally, this is where you will discover if there are any claims on your property.  Occasionally, however, clerical errors, misrepresentation from previous owners and Murphy's Law can prevent an owner from knowing about these claims.

So Why Is Title Insurance Needed After a Title Search Has Been Done?

Despite the exhaustive search performed prior to the purchase of property, many things can be missed.  Mistakes in public records, pending legal action, unreleased mortgages, unpaid taxes, fraud and misinterpretation, among many other scenarios, can all contribute to problems down the line.  Sometimes a deed can surface that predates public record, putting a title in question.

For example, say you are a new homeowner.  Without your even having been aware of it, a contractor refurbished the kitchen before you bought the property.  Say the previous owner did not pay this contractor.  They could have a valid claim on your property and may file a lien on you, the property holder.  This is known as a Mechanic's Lien.

This lien may have existed in the public record at the time you bought the property.  Nevertheless, a lien holder cannot be denied their interest in the property unless their claim has been settled or released.

A lien holder's claim on a property is considered valid until it has been satisfied.  This is true even if the property has been sold.  As the new property holder, you are now responsible for this lien.

Before you begin looking through your bank statements to find a spare $20,000 to pay someone you've never met for work you didn't even know was done, take a moment to be grateful that you have owner's title insurance.

Title insurance is designed to protect your rights and the rights to your property.  Put simply, title insurance will pay for defending you against any lawsuits attacking your title, and will either clear up title problems for you, or pay you for any losses you may incur.

While purchasing owner's title insurance is not mandatory, it is a very good idea.  It is purchased for a one-time premium, ideally at the time you purchase your property.

Keep in mind, you can increase your title insurance coverage when the value of your property goes up.  Talk to your escrow or title professional for details.

Since I'm Required to Have Lender's Insurance, Why Do I Need Owner's Title Insurance?

You may be wondering why the title insurance taken out by your mortgage lender (known as ALTA) doesn't cover you.  The loan policy protects the lender against the types of losses described above.  In short, ALTA insurance protects your lender and an owners' title policy protects you, they buyer.

Title insurance can protect you from many situations.  Forged deeds, releases or wills; undisclosed or missing heirs; instruments executed under invalid or expired power of attorney; deeds by persons of unsound mind or minors; fraud; and liens for unpaid estate, inheritance, income or gift taxes; indeed, many unforeseen situations may be thwarted by acquiring title insurance.